Revenue Issues to Address
- How much money did you earn?
- Did you take out a loan or invest? If so, how much and who paid for it?
- The IRS compels service-based firms to levy sales tax in various states in the United States.
Make sure you handle this correctly, or it will bite you in the buttocks later.
Answering Expense Questions
- Have you ever paid somebody (including yourself)?
- Is this person a W-2 employee or a W-9 contractor? (More information is available on the Less Accounting blog.)
- Did you obtain W-2 and W-9 forms from these individuals?
- If you have W-2 employees, did you appropriately withhold taxes?
Wagepoint.com is our recommendation because payroll taxes are so difficult to calculate.
- Have you classified your expenses? This will most likely be the majority of bookkeeping work for independent web developers.
Okay, let’s take it easy… You’ve heard your accountant tell you to “categorize your expenses,” but what does that even mean?
First, let’s define what a business expense is.
When you spend money on business-related needs, it is considered a “cost.” A business expense is defined as follows by our tremendous and intense IRS:
“A company expense must be both normal and required.” Ordinary expenses are those that are typical and accepted in your line of work. A necessary fee is both beneficial and appropriate for your company. A cost does not have to be indispensable to be considered necessary.
BORING! Okay, that’s a long, rambling way of saying…
Is this something that all other front-end devs acquire for their businesses, and is it required to run yours? If so, it’s most likely a business expense.
Things that are most likely NOT business expenses: -Mr. T’s autograph
-Gilding your laptop.
-Either a jetpack or a hoverboard.
-Clothes, unless you must wear a uniform. And, no, a plaid shirt, sweatshirt, and jeans do not constitute 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 the 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.
Be Warned of Grey Areas
Here are some ideas for being highly aggressive with your business spending. Always consult with your CPA and leave them to perform their job.
-Unless you’re on an overnight business trip or entertaining a vendor, client, or client prospect, you’re not supposed to claim coffees while working at a coffee shop. This becomes murkier if you are a remote worker who works from a coffee shop.
-Combining personal and business travel. You take a few extra days when traveling for a conference to see more sites in the city you’re visiting.
-Maybe your “software” purchases from iTunes include music purchases.
-Gym memberships might fall under an “employee wellness program.”
Accountants of many types
Accountants are classified into several “types.” Some are quite “by the book,” with black and white rules. Then there are those accountants who are more active when it comes to expense deductions. Going gray is a term that says you’re going to be aggressive with deductions but not dumb (see examples above). Consult with your accountant about what they are comfortable deducting. You may determine that your accountant is either too aggressive or not aggressive enough. Being too active may result in an IRS audit; being too passive may result in you paying more taxes than you should.
What exactly is a “write-off” or “tax-deductible”?
When you file your taxes, each business expense you deduct reduces your taxable income. Each cost, however, must fall into one of the IRS’s pre-determined expense categories. However, depending on the expense category, you can only deduct a fraction of the overall amount. Here’s an illustration.
You pay $100 to take a customer out to supper. Because this is classified as “Meals / Entertainment,” your CPA can only “write off” half of the $100. So, keep in mind that a company expense isn’t “free money”; it’s just not fully taxed as income.
Make a Schedule for Bookkeeping
You might use a spreadsheet to manage your bookkeeping. You might manually record transactions, or your bank may allow you to export them in CSV format.
Self-promotion: You may utilize accounting software for freelancers to assist you in keeping track of your bookkeeping.
Whatever you pick, make sure to create a bookkeeping schedule. On Friday evenings, just before the weekend, I like to complete my bookkeeping. I create a recurring calendar event and set aside 30 minutes per week to meet bookkeeping responsibilities. Then, all of a sudden, it’s the weekend!
No unpleasant end-of-year surprises result from meticulous recordkeeping. In addition, your accountant will be able to advise you on tax planning better, and you will be able to make wise spending selections throughout the year.
Source: CSS Tricks
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