Tax time can be stressful but even more so when you're running your own consulting practice. From trying to understand deductions to tracking expenses in the right way so they count, there's a lot to understand. In a webinar for Nonprofit.ist experts only, Audrey Blackburn of Blackburn Consulting, Accounting and Tax, offered a few tips that may help consultants breathe a little easier when April 15 comes around.
Create a good filing system - preferably digital
What happened to the receipt from that dinner with the client that you can totally write off? If you're not sure, that could mean trouble if you're audited. To prevent later stress, keep everything organized - whether it's a paper filing system or a digital one.
Did you know you don't actually have to keep paper results any more? You can keep a digital copy of your paper receipt as long as it's clear, readable and has all the information that the IRS might want to see.
Digital copies of receipts also mean you won't have to worry about faded ink when you try to pull out an older receipt. One app that Audrey recommends is Expensify but you can also use a cloud storage service like Google Drive to organize your receipts. the most important thing is that they're organized. Can you easily go back and search through receipts to find the one you're looking for? If not, time to find a new system.
Make sure your documentation is solid
If you get audited, the IRS won't just be looking for a copy of the receipt, they're looking for the who, what, when, why of your expenses as a business. An easy way to keep track is to write on your receipt who you met with and why you met with them to confirm that it is indeed a business expense and not personal one.
You don't have to go into details about everything you discussed - you can keep confidentiality - but you should write the name of the client and what you were talking about in general. Make sure the date and location are very clear on the receipt as well. It may sound redundant - "of course it's a a business expense - it's on my business card!" - but remember, the IRS see people using business cards for personal expenses all the time. By tracking what you're doing in the moment, you'll save yourself a little grief later.
If you're running a business, use a business account.While it may seem simpler to have a single account to manage your personal and professional expenses with, it's in your best interest to have a separate business checking account. You can you get in trouble for paying for personal expenses out of your business checking and vice versa, depending on the type of business you have, because there are tax implications as well. Keeping separate accounts keep everything easier for you or your accountant.
Paying contractors? Get a W-9 form upfront.
By getting a W-9 form from your contractor up front, you'll be able to say what kind of taxing entity they are - are they a sole proprietor? a partnership? That information will determine if you have to do a 1099 for them. Also make sure they invoice you for their services - there are important distinctions between a contractor and employee that you should make sure you follow.
No matter if you're a new consultant or a long-time consultant the most important thing to remember is that it's okay to ask for help if you need it. As a consultant yourself, you should know the value of having an expert's guidance!
