Bookkeeping & Taxes7:51 with Pasan Premaratne
Before we wrap up our discussion on freelancing, let’s not forget a very important topic - taxes! In this final video let’s look at why always thinking about taxes is really important, and how accounting can help you achieve your goals.
When you run a business, you should always keep an eye on your financial health. 0:00 Not doing so can lead to the end of your freelance career. 0:04 The topic of accounting is vast, 0:07 but there are only a few things you need to know 0:10 to make sure your company is healthy and on the right track. 0:12 You need to know how much you're spending, 0:16 and where you're spending it, 0:17 and you need to know if you're making enough money to cover your expenses. 0:20 An easy way to keep an eye on how much you're spending 0:23 is to look at your expense reports. 0:26 Expense reports are a fancy document 0:29 that just keeps track of all the money you spend 0:32 to make sure what you're spending is accounted for. 0:34 That is, you're not spending more money than you make. 0:37 Earlier we used FreshBooks to create and send invoices. 0:41 The software also helps you keep an eye on your money. 0:46 Freelance designers use a host of services to keep their businesses running. 0:49 They pay for web hosting, storage services like Dropbox, 0:53 Adobe Creative Cloud accounts, and many, many more. 0:56 Keeping track of these expenses serves multiple useful purposes. 1:01 Let's go ahead and add a few to our FreshBooks account. 1:05 You add the amount, date of transaction, 1:15 vendor, 1:20 the category, and any notes you want to associate with the expense. 1:25 It's important to categorize your expenses, 1:28 and any good accounting software should provide you 1:32 with some categories to start. 1:34 We're going to add a hosting expense from the past month. 1:37 Your expenses won't always fit 1:40 into the provided categories, and that's fine. 1:42 You can always create your own categories 1:44 to help you understand your expenses better. 1:47 We're going to add a hosting category under Professional Services 1:50 to help us keep track of this expense. 1:53 FreshBooks also helps you add in all the little nuances. 1:57 You can specify how much of your total was tax, 2:00 whether the expense is a recurring one, 2:03 and you can attach a receipt if you have one. 2:07 All accounting software should let you do this. 2:10 In our example, our web hosting could be a service that we provide for our clients, 2:13 so we have to bill them for it. 2:18 FreshBooks allows you to associate an expense with a client. 2:20 Let's go ahead and do this as well, 2:24 and since our expense is recurring, we'll check that box too. 2:27 Okay, so now that we have recorded this expense, 2:39 FreshBooks allows us to convert it to an invoice 2:41 with the click of a button. 2:44 See how simple that is? 2:47 No more trying to remember whether you charged them for hosting 2:49 and whether they followed up on it. 2:51 FreshBooks also attaches a status to the expense item, 2:53 indicating whether it has been invoiced and whether the invoice has been paid off. 2:57 If you go back to our home page, 3:06 FreshBooks also gives us a comprehensive summary of our invoices and expenses. 3:08 Hovering over each month, we can get a quick summary 3:13 of any outstanding invoices and any unbilled expenses. 3:16 This is really helpful and can help us keep track 3:20 of how much money we're owed. 3:23 Apart from the very useful function of keeping track 3:27 of how our money is being spent, 3:29 why bother tracking every single expense? 3:32 The main reason is for taxes. 3:34 Come tax time, having our expenses categorized and documented 3:37 means we can obtain certain deductions. 3:40 If you pay for your own health insurance, 3:43 then it can be deducted from your tax returns. 3:46 If you work out of your home, you can claim certain expenses for the home office. 3:48 And even if your business ends up not making money, 3:52 you can deduct that from your taxes. 3:55 But to be able to do any of this, 3:58 you have to track your expenses meticulously as proof. 3:59 As with anything tax-related, regulations vary across states and countries. 4:03 So be sure to check with a tax professional 4:08 for the deductions that are available to you. 4:10 Which brings me to the always wonderful topic of taxes. 4:13 As a freelancer, it's your duty 4:17 to keep track of all your income earned 4:19 so that you can send a bit of it away to the government as taxes. 4:21 That's fun, right? 4:24 When you work for someone, your income taxes 4:26 are already taken out of your paycheck, 4:29 so you don't have to think about it. 4:31 As a freelancer, however, that's something you have to take care of. 4:33 Keep detailed track of all your income receipts 4:36 so that you won't be accused of doing anything wrong come tax time. 4:39 Aside from keeping track of your income, 4:43 you'll also have to pay your income taxes at the end of the year. 4:45 This is another area that, if you forget, can essentially ruin your business. 4:49 Make it a point to keep an estimate of the amount of taxes you owe, 4:54 and then put that money aside so that you are prepared 4:58 to pay your taxes and not scrambling to get money together. 5:00 This is really important. 5:04 Because people are so used to having taxes taken out of their paycheck, 5:06 when they're self-employed they forget all about income taxes. 5:09 Not being prepared and having to pay such a large amount at the end of the year 5:13 can really put your company behind in terms of cash flow. 5:17 Rather than paying all at once, 5:21 you can pay estimated tax payments quarterly towards your taxes. 5:23 These smaller amounts can make it easier to stay on top of your payments. 5:26 Aside from your income tax, you will also have to pay self-employment taxes 5:30 such as Social Security or healthcare. 5:35 These rates change from time to time, 5:38 and the amount you pay depends on all sorts of things, 5:40 including your company's structure. 5:42 You could try and do it all on your own, 5:45 but making a mistake when it comes to taxes 5:47 is the worst kind of mistake you can make. 5:49 It's definitely not easy to solve. 5:52 I recommend finding a tax professional who can help you with all these issues. 5:54 When looking for an accountant who can guide you on these matters 5:59 and do your taxes for you, take your time. 6:02 The best way to go about it is to be as picky 6:05 as you would be when deciding whether you want to work for a client or not. 6:07 Take your time and talk to a bunch of people. 6:12 Treat it like an interview process. 6:14 You are the client in this situation, and you want to find someone 6:17 who can do the best job for you. 6:19 When selecting an accountant, they should have the following traits. 6:22 First, a good reputation. 6:25 Talk to other freelancers about an accountant or an accounting firm. 6:28 Bad news spreads quickly, and if there's anything negative 6:32 you will hear about it immediately. 6:35 Your accountant should also be a great communicator. 6:37 Just like a good client, a good accountant should be well-rounded in communication. 6:40 They should get back on time with any questions you have, 6:45 and they should be able to explain any actions they are taking. 6:48 They should also be an educator. 6:51 You want an accountant who's going to help you run your business 6:54 and not just be a number cruncher. 6:57 Find someone who is willing to take the time to explain things to you 7:00 and guide you through the murky areas. 7:03 When you're interviewing accountants, 7:06 make sure they have experience dealing with your industry 7:08 and have worked with some of your peers. 7:10 The last thing you want is an accountant who is 7:13 as unfamiliar about the business aspect of your industry as you are. 7:15 Finally, you want them to be available. 7:19 You should be able to reach them in your time of need. 7:22 Just as you set rules with your clients, 7:25 you shouldn't expect your accountant to be available on the weekends. 7:27 But they shouldn't be more than a phone call or e-mail away. 7:30 Remember, at the end of the day, 7:33 accounting will help you watch over your money 7:35 but it won't make you any money. 7:38 Learn the essentials you need to run your business, 7:40 but don't spend a lot of time managing your books. 7:43 Invoice effectively, track your expenses, 7:45 and log your income, and let your accountant do the rest. 7:48
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