You have decided to leave your employer and make a go at a consulting business on your own. Perhaps you were a stay at home mom and now the kids are in school and you opened up a small interior design business from your home. Or, you are recent graduate of an arts and design school and have chosen to open up your first photography business. All three of the scenarios fall under the umbrella of being a ‘freelancer’. So what happens when you initially collect your first checks for a job well done?
If you started a business as a freelancer, consultant, or some home based business, the reality is that most of you will earn your first 1099 this year and will likely have to file Schedule C (sole proprietor) with your first year of income. As you navigate your way through these unchartered waters, here are five business moves you should make as a freelancer.
- Make sure you set up a separate business checking account and a business credit card. It is not a good idea to run your business expenses through your personal checking or your personal credit card. It will be confusing to someone (most notably the IRS) looking at your business to understand why you would pay for business expenses through a personal account. This is especially going to be true when it comes to things like meals, entertainment, and travel.
- Keep track of all start up costs. Did you have any specific equipment, furniture, or other items that needed to be bought to start your business or necessary for you to do your freelancing job? Some or all of these expenses may be deductible to your business. You can keep all of your receipts in a folder or use a piece of software such as Neat Receipts.
- Make sure you keep a log of all of the miles that you drove during the course of the year that were attributable to your business. You may deduct the actual expenses related to the upkeep of the car or the mileage which will be key to look at during tax time. You should keep records on both.
- Get store cards in the name of your business. Ultimately, you will be buying supplies at places like Office Depot or Staples. Make sure you have a business account with that office store. You might get a business account with a place like Costco or Sam’s for the bulk supplies/items you will need in your business. In general, it is crucial that these cards are in the name of your business so you can make a separation of church and state.
- Set up an estimated tax account and set aside 25% of the checks you collect in this separate account. While you should really talk with your CPA to determine your individual federal and state income tax rate, it’s going to be up to you to withhold taxes. In the past, your employer likely did that for you. Consequently, a first year real rookie mistake is to spend the money you make during the year and then get stuck with a tax bill come April. By setting aside a percentage of every check you earn, you won’t leave yourself in a precarious situation come tax time.
If you are a freelancer and get a 1099, a sole proprietor of entity will happen de facto if you choose no other form of entity for your business. Remember, it will be your responsibility now to determine how much tax you owe. In addition, as a sole proprietor, you will be responsible to pay both halves of the Social Security and Medicare tax. While the sole proprietorship is extremely easy to get up and running, one major downside is unlimited liability. Should you get sued, it is possible to go.
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Ted Jenkin, CFP®, AAMS®, AWMA®, CRPC®, CMFC®, CRPS® Co-CEO and Founder oXYGen Financial, Inc. Securities and Investment Advisory Services offered through NFP Advisor Services, LLC (NFPAS), Member FINRA/SIPC. Oxygen Financial is not affiliated with NFPAS.