The following is a guest post by my friend Allan Branch. Allan runs Less Accounting, web software for accounting. True story for me: it’s only been this last year where I’ve gotten my stuff together and taken accounting seriously. (With a lot of help, of course, thanks Dee!) The advantages are significant. Not worrying about tax time and owing huge unknown amounts of money. Not scrambling to do everything at the last minute. But my favorite thing is having an understanding of the ins and outs of the business. It’s a lot easier to see what needs to change when everything is organized. Allan will explain that getting started on this isn’t that difficult. There are just some pretty straightforward questions you need to answer.
Revenue Questions to Answer
- How much money did you collect?
- Did you borrow money or take an investment? If so, how much and from who?
- In some U. S. states, the IRS requires service-based businesses to charge sales tax.
Make sure you’re handling this properly, because it can bite you in the butt later.
Expense Questions to Answer
- Did you pay anyone (including yourself)?
- Are they a W-2 employee or W-9 contractor? (More info on the Less Accounting blog)
- Did you collect W-2 and W-9 forms from these people?
- If you have W-2 employees, did you withhold the taxes properly? Allan’s advice:
payroll taxes are so difficult to figure out you should just use Wagepoint.com.
- Did you categorize your expenses? This will probably the majority of bookkeeping work for freelance web devs.
Okay, let’s slow down… You’ve heard your accountant say, “Categorize your expenses,” but what the heck does that even mean?
First, let’s talk about what a business expense actually is.
When you spend money on related business needs it’s consider an “expense.” Our great
and powerful IRS defines a business expense this way:
A business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your field of business. A necessary expense is one that is helpful and appropriate for your business. An expense does not have to be indispensable to be considered necessary.
BORING! Okay, that’s a long, vague way to say…
Do all the other front-end developers buy this for their business, and is it necessary to run your business? If yes, it’s probably a business expense.
Things that are probably NOT business expenses:
- An autograph from Mr. T.
- Gold plating your laptop.
- A jetpack or hoverboard.
- Clothes, unless you’re required to wear a uniform. And no, a plaid shirt, hoodie and
jeans are not a “uniform.”
Typical expenses for a freelance front end developer:
- Phone cost, data/service plan.
- Software like GitHub, CodePen, Skype, etc.
- Internet connection.
- Other Mobile Devices (such as iPad, Kindle).
- Any educational resources, for example: eBooks, conference tickets, courses at CodeSchool, etc.
- Travel costs (taxis, Uber, flights, etc.) to client locations or educational events.
- Professional advice from lawyers, accountants, etc.
- Possibly your home office. More info on Less Accounting blog.
- Interest paid on business expenses.
- Furnishing for your home office, for example: your office chair, desk and lamp. (p.s. I make lamps!)
- Merchant fees like PayPal, Stripe, etc.
- Gifts sent to vendors, clients or prospects… or me ;)
- Health insurance, Professional Liability Insurance.
Gray Areas: Be Warned
Here are some possible ways to be very aggressive in your business expenses. Always check with your CPA, and let them do their job.
- You’re not supposed to claim coffees while you work at a coffee shop unless you’re on an overnight business trip or you’re entertaining a vendor, client or client prospect. This gets even more gray if you’re a remote worker and use a coffee shop as a workplace.
- Mixing in personal travel with business travel. While traveling for a conference, you take a few additional days to see more sights around the city you’re visiting.
- Maybe your “software” purchases from iTunes include music purchases.
- Gym memberships might fall under an “employee wellness program.”
Types of Accountants
There are a few different “types” of accountants. Some are very “by the book”, where rules are black and white. Then there are some accountants who are more aggressive with expense deductions. There’s a term called “going gray,” (see above for examples) which means you’re going to be aggressive with deductions but not stupid. Talk to your accountant about what they feel comfortable writing off. You may decide your accountant isn’t aggressive enough or they’re too aggressive. Being too aggressive might result in an IRS audit, being not aggressive enough might leave you paying more taxes than you should.
What does a “write-off” or “tax-deductible” mean?
When you prepare your taxes, each business expense you claim lowers your taxable income. But each expense must fit into one of the IRS’s pre-determined expense categories. But, depending on the expense category, you only write off a percentage of the total expense amount. Here’s an example.
You take a client to dinner for $100. Your CPA can only “write off” 50% of the $100 because this is considered “Meals / Entertainment.” So remember a business expense isn’t “free money,” it just isn’t fully taxed as income.
Make a Bookkeeping Schedule
To handle bookkeeping, you could use a spreadsheet. You could manually record transactions or your bank might even allow for a CSV export.
Self-promotion: You could use accounting software for freelancers designed to help you stay on top of bookkeeping.
Whatever you decide, be sure to set up a schedule for bookkeeping. I like to do bookkeeping on Friday afternoons right before the weekend. I set a repeating calendar event and block off 30 minutes per week to knock out those bookkeeping tasks. Then boom, helllooooo weekend!
Careful bookkeeping means no nasty end-of-year surprises. Plus your accountant will be better able to advise you with tax planning, and you’ll know how to make smart spending decisions throughout the year.
I’ll leave the reader to determine the pros and cons of less accounting, but I’ll at least provide an alternative here: http://www.waveapps.com – Wave is completely free for invoicing and accounting, and has a paid payroll product tightly integrated as well so you don’t even need to go elsewhere for payroll. Freelancers especially love using Wave as it’s specifically tailored software for small businesses.
Also, interested in accepting credit cards on your invoices? Wave seamlessly hooks up directly with your Stripe account to display a credit card form on every invoice.
Editor note: Brian meant to disclose he’s a Wave employee. He asked me to edit this to say that.
Brian, as the author of the article and cofounder of LessAccounting. I think it’s a bit shady that you don’t disclose you’re NOT a wave customer, but a wave employee.
Thanks, Allan. It was only my intention to provide an alternative. Not as a customer or employee, just as a person. I freelance on the side as well, and it’s great when I can use the same product I work on during the day for my off-hours. There’s no ill-will or hard feelings here, I hope the same goes for you. :)
Thanks for changing your avatar and adding the disclosure.
Very very useful for me thanks
Thanks for the post. I tend to use a CPA for end of year taxes. I think it’s a great idea to discuss grey areas with your CPA.
This is great! Thanks for the share- This has been one of the most challenging things about freelancing. Thanks for adding some humor in this too, I will have to add sending you a gift to my expenses. haha.