Join Petrula Vrontikis for an in-depth discussion in this video Tracking business expenses, part of Running a Design Business: Freelancing.
The most logical way to track your expenses is to make sure that you keep your personal expenses and business expenses separate. My suggestion is that you have separate checking accounts and separate credit cards. This will help you easily track, categorize, and recap your business expenses. Here's a list of allowable business deductions that designers often use. Tax laws occasionally change, but your accountant will know if there are any clarifications or exceptions to this list. Often, your car will be used for both personal and business.
Keep mileage records, so you know what percentage is deductible for business. The IRS requires written records. Deduction percentages for meals, gifts, and entertainment categories often have limitations, and these frequently change. Talk with your accountant about the current laws. If your office is in your home, the IRS requires that you create a floor plan indicating the living space versus the office space. You can use it to calculate the percentage of your home that is used as an office.
As backup documentation, take photographs of the space. Let's say you live in a 900 square foot apartment, and pay $1500 a month for it. Your floor plan indicates that one- third of your space is used as an office. When you pay your landlord each month, pay $1000 from your personal checking account, and $500 from your business account. You would use this two-third and one- third calculation when paying utilities and any other business expenses that are shared. If there are any inquiries by the IRS, they require receipts to determine the validity of your deductions.
In addition to printed credit card and checking account statements, you should keep original paper register receipts for everything that you plan to deduct. You can deduct payments you make to your own subcontractors. You'll need to get the Employer Identification Number or EIN and follow the same W-9 and 1099 filings as explained earlier in this chapter. Remember, when you start hiring other people, it's absolutely imperative that you consult with an accountant so you know what your tax and filing obligations are.
Being able to deduct business expenses from your total income can really save you a lot of money. The tradeoff is that you have to keep track of them properly. Inquiries and audits are expensive even if you don't end up owing more money. Establishing good tracking and categorizing systems at the beginning is great so you're able to find things when you need to.
- What is a freelancer?
- Tracking expenses
- Paying taxes
- Understanding business licenses
- Creating contracts and invoices
- Preparing, transferring, and storing files
- Tracking billing and payments
- Managing your work-life balance