Fast Company

Tax Tips and Tricks

Don't let accounting prevent you from taking the plunge.

Want to go into business for yourself but worry about managing your money? Sure, you need to pay your taxes four times a year -- something employers do for their employees -- but making the change isn't as scary as it seems. There are several things you can do to streamline your financials and free your mind to focus on making the grade as a free agent.

Jan Zobel, an independent tax specialist, helps free self-employed people and independent contractors from shoeboxes stuffed with receipts and taxing IRS audits. Drawing on 20 years of tax work with free agents, Zobel wrote "Minding Her Own Business: The Self-Employed Woman's Guide to Taxes and Recordkeeping" (EastHill Press, 1998). She has these suggestions for managing your money.

Time is money.

File your old appointment book, calendar, or daily planner away with your financial information and tax materials. You can use your schedule to clarify and verify receipts and other records of travel mileage, telephone expenses, and other business expenditures.

During an audit, the IRS challenged one of Zobel's clients, a psychotherapist, on thousands of unlogged business miles -- distance traveled as he drove between San Francisco and Palo Alto to visit clients. "I photocopied his calendar pages, and the IRS was willing to accept them as records of car use," Zobel says. "Every week, his appointment book showed going here to there."

The devil is in the details.

Record every deposit made to your bank accounts. If you note the source of each deposit in your checkbook, it'll be easy to identify gifts and loans -- which are not taxable.

One of Zobel's clients didn't do this, and he ended up embroiled in a criminal investigation. His tax return claimed $36,000 for the year, but an audit uncovered income of $72,000 -- twice as much money as he reported, and most of it supposedly from gifts. But because he had no record of the gifts, the IRS took him to task. "If what shows up on your tax return is less than the deposits you made, the IRS assumes unreported income," Zobel says. "Everyone thinks they'll remember that $1,000 gift, but expecting to remember everything about your finances a year later when you do taxes is unrealistic."

Funnel your resources.

If you have a business account, deposit all money from your work into it. From there, you can transfer it into your personal account. Keep your business and personal expenses separate by writing only business checks out of the business account and by writing personal checks from your personal account.

But if you don't have a separate business account, don't sweat it -- the IRS doesn't require separate accounts. "But be sure to mark checks with 'personal' or 'business' -- or more detailed information -- on the memo line or in your check register," Zobel says. "You want to keep records of which checks are business."

Don't flex your plastic.

Use one of your credit cards just for business expenses. Even though you can't deduct personal credit card interest, you can deduct 100% of work-related credit card interest.

That also makes it easier to decide which card to pay off if you can only afford to cover one at the end of the month. "If you have enough money to pay off only one card, pay off the personal card," Zobel says. "You can write off the business interest."

Save sales slips.

If you're ever audited, you'll need your canceled checks as well as your receipts. Be sure to keep credit card receipts too -- monthly statements might not identify what was purchased.

"Just because you say you bought office furniture doesn't mean you bought office furniture," she says. "But if you've got a detailed receipt, you're OK."

Steer clear at the end of the year.

On December 31, record your car's odometer reading so you keep track of how many miles you drive each year. But be sure to record how many of those miles were driven for business.

Keeping track of your business miles helps you calculate what percentage of your car expenses can be deducted; write-offs max out at about $3,000. But Zobel says most people use the mileage rate method -- 31.5 cents per mile.

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