Raise your hand if this has ever happened to you.
You've put in another hard year of work in freelance childcare and freelance child education. You were one of the hardworking, lucky ones- you made most of, or possibly your entire, living working for yourself while doing what you love. It's not the easiest way to make a living, and there are some expenses, but you do okay, you make it work, and you feel in charge of your own destiny.
The end of January comes, and you get your 1099 and W-2 from every family or client that you made more than $600 dollars from (because that's the law!). You dutifully spool up your Turbotax, or drop your paperwork and some receipts with your accountant, and await the damage. The bad news doesn't take long to come: you owe, and you owe a lot. Gone are the fantasies of using a modest refund to pay off some debt, or take a trip, or make that electronic upgrade you wanted so badly. Now, you're reeling, trying to figure out how you're going to pay Uncle Sam and wondering how it got so bad. This was a lot of us on April 15th this year. Especially with all the changes to the tax law.
Contractors reporting their income with the 1099-MISC are just as responsible for income taxes, social security, and Medicaid as employees, but unlike employees, they have to pay their taxes themselves- they aren't automatically withheld from each check. If you decline to pay taxes as you go, don't set enough aside, and don't defray your taxable income by keeping good records of your expenses, you are going to be, inevitably, staring an uncomfortably large bill come April. When you're self-employed, you have more responsibility, not less, and need to make sure you are proactive in getting the IRS their money. Keeping your eventual, inevitable taxes on your mind and a part of your personal finances as you go is much less painful than the nasty shock of the $2,000 tax bill you can't pay. Save yourself the interest and penalties, and the added monthly bill of a payment plan with the feds- do it right as you go!
Keep in mind, also, that all this advice applies to those nannies who get are W2 employees of their clients and are having taxes withheld for them. You hope that the family is keeping proper records are withholding as much as they should, but they might not be, and you are still responsible- Protect yourself! It's worth it to sit down and have an honest conversation with your client about what the tax situation is going to be for the both of you. This shows that you are conscientious and professional, and reminds them that, in no uncertain terms, they have tax liability and responsibilities here- Even if you're a contractor, they're going to have to get you, and the IRS, a 1099.
Keep Proper Records
Every time you get paid, every time you drive deductible miles, and every time you endure a business expense, you should be keeping a record of it. A spreadsheet or logbook is sufficient for those disciplined enough or so-inclined, and there are also commercial options- Quickbooks Self-Employed and other programs like it take a lot of the busywork and headaches out of keeping track of this stuff, allowing you to just put in numbers and relax. Whichever method you want to choose, just make sure it works for you- keeping good records as you go isn't really optional if you want to be responsible.
Pay Quarterly Taxes
If you expect to owe more than $1,000 in a tax year, which you probably do if your freelancing was a big part of your annual income (or the whole enchilada!), you should be paying your taxes quarterly. This prevents you from having to pay the IRS in one big sum, and lets you pay as you go without incurring interest- think of it as a payment plan in four chunks for this year's tax return, and the wisdom behind it becomes apparent. Keep track of your due dates, and consider getting help from a tax preparer or tax preparation software if you need it.
Set Some Money Aside Each Time Some Money Comes In
Look, we get it- when you're employed, the worst part of getting paid is seeing how much of your check you won't be pocketing. A lot of freelancers love getting exactly what they're owed come payday, and figure they'll sweat the tax bill later. Don't stumble into this sort of thinking. If you've been working for yourself for long enough, chances are you already know how disruptive and anxiety-inducing a big tax bill can be when they come down the pike. Every time you get paid, set a small amount of it, like 10-15%, aside in savings, and when it comes time to pay taxes, use that. Who knows- you may even be able to pay yourself a refund if you saved enough!
Track Your Expenses!
If you work freelance, chances are, whether its miles or business purchases or meals, you have business expenses. A lot of these are tax deductible! When you reduce your taxable income by reporting all the expenses to which you are entitled, you lower your tax bill. That's a win-win. Don't be like all those who don't bother to keep track of expenses or save receipts, or you'll miss out. Keep track, and make sure that for every expense you claim, you have the requisite proof. You might think that keeping a mileage log is hard work, and you might assume you'll never get audited so you can just estimate what you paid for that one thing, but everyone who says these things is only willing to cut corners until they get audited- Trust us, you don’t want those problems. There are even a number of well-trusted apps that you can sync up to your bank accounts and your phone GPS to track paychecks, expenses, and mileage automatically as you go. Then at the end of the year, they spit out a handy document that makes your tax calculations simple. These apps have the added benefit of letting you know if you owe taxes on a quarterly basis so that you can estimate whether you will owe or get a refund come tax day.
As far as expenses, you will want to pay attention to: meals you eat while out with the kids, craft supplies you buy, background checks you pay for, any travel expenses incurred while on the family summer vacation. Basically, anything job related that the family doesn’t reimburse you for, you should file away as a business expense.
Everyone hates taxes, but if you follow these tips, you can make it almost like a mandatory savings account. Overpay a bit on your taxes during the year, and carefully track your deductible expenses, and you will be looking at a nice refund rather than a big bill come April 15th.