Being self-employed is a dream for many. You get to be your own boss, set your own hours, and negotiate your pay. However, you are also responsible for filing and paying your tax.
Sometimes, when you work for a company, they deduct taxes from your paycheck. However, as a freelancer, you must send invoices, subtract expenses, and budget for taxes.
This process can seem complicated at first, but after you file your first tax return, you will find it gets easier every time. Below is a step-by-step guide on how to prepare your taxes and finances.
How Does Tax Work?
As a filmmaker, you will likely be self-employed. This means you are your own boss and in charge of finding your own work. The first step is to let the tax man know you are self-employed. Then, you can start to track your payments and file your tax returns.
Learn The Essentials
In the US, you need to start paying taxes if your income exceeds $12,950 per year. The tax year is 12 months, from January 1st to December 31st. Keep in mind that the percentage of income tax you pay is dependent on your gross yearly earnings.
In addition to income tax (10-37% depending on your income and state), freelancers must also pay an extra self-employment tax of 15.3%. This tax represents Social Security and Medicare paychecks unless you are signed up to another private healthcare provider.
If you work as a freelancer in the US, your clients will provide you with a 1099-NEC form for every job you complete. However, if you receive payment from an online service like PayPal, you’ll receive a similar form called the 1099-K form.
Your clients will also send copies of these forms to the IRS to report your income. Even if you don’t receive a tax form from your clients, the IRS still expects you to report all income.
Make Sure You Track Expenses
The taxman knows that it costs money to run a business. As a result, when you are self-employed, you can deduct some allowable expenses from your taxable profit.
As mentioned, you only have to pay tax on your profit. For example, if your turnover is $50,000 and you spend $10,000 on expenses, you only pay tax on $40,000 (aka your taxable profit). Depending on your business and the nature of your work, your costs may vary.
Here is a list of things that count as taxable expenses:
- Travel, fuel, and parking costs to and from work
- Office costs, stationery, phone bills, office rent
- Equipment, hardware, rent or purchases
- Clothing expenses, any specialist clothing
- Advertising, marketing, and website costs
- Training courses related to your business
When you complete a yearly tax return, you must have a clear idea of your profit and expenses. This process is as simple as keeping a list on paper or a spreadsheet. You must also keep evidence of your profits and expense receipts to show the tax man.
There are also many accounting apps available to help you keep track of your income and tax, so it doesn’t have to be a difficult process.
Remember Additional Charges
One of the main flaws of freelancing is that you are no longer entitled to sick pay or paid holiday leave. So you will need to be more careful with your spending. As such, before becoming self-employed, it is crucial to understand all payments and additional charges.
Your self-employment tax will cover your pension and Medicare costs. However, you can also pay into other private health care and pension plans. How much you allocate to your pension is a personal decision, but financial experts recommend saving at least 10%.
You might also have student loan repayments taken from your account monthly. The type of loan you have will determine how much you pay back every month. In addition, consider joining a film union as these will offer advice on taxes and pension plans.
How To Send An Invoice
When you complete a job, you must send an invoice to get paid. Your invoice is simply a document stating what work you have done, how much you will get paid, and your bank details.
You will typically get paid within 30 days of sending your invoice; however, some companies pay much later. Therefore, you should settle payment terms with your employee before you start every job.
An invoice is a single page long and must contain the following basic information:
- The word ‘Invoice’
- The date of the invoice
- Your name and address
- Your employer’s name and address
- A brief description of the work you have done
- The total amount you are charging
- Payment terms (e.g. within 30 days)
When you have completed a job or project, you send an invoice to your client by email. You will need to ask how often you should send an invoice for work, either weekly or monthly. To help, you can download a free invoice template from our film production documents.
Chase Late Payments
If you are not paid after 30 days, you will need to start chasing up the payment (unless stated in the original agreement). Here is a sequence you can follow on how to go about this;
- Firstly, re-send the invoice. Occasionally, emails go missing, and people forget to pay.
- If you have not heard back after a week, resend the email and call them if you have a phone number. If they fail to contact you, try to get in contact with someone higher in the company or the accountancy team if they have one.
- If you’re certain your client will not pay, you can send an email and letter to their company. This letter can also include a small claims court threat.
- Then, if they still fail to pay, you need to decide whether to take them to court.
- Lastly, end the client relationship. Don’t be afraid to get rid of a bad client.
Managing clients is a skill you can only become an expert at with practice. Good communication before accepting a job will help you avoid many future problems.
File Your Tax Return
Lastly, when you are self-employed, you only need to complete an online tax return once a year. Your tax return is a breakdown of your total taxable income and expenses for the year. For an organized person, this process should take less than an hour to complete.
If you fail to complete your tax return on time, there will be penalties. You can choose to pay your tax in full or monthly as a short-term payment plan. However, it is a good idea to be on top of your tax payment so that it doesn’t affect next year’s profit.
Given these points, you should try keeping aside between 20-30% of your monthly profit. This is the simplest way to make sure you can pay your taxes and expenses. If all this sounds too complicated, you could always hire an accountant to do this for you.
Tax preparation doesn’t have to be complicated or stressful. Make it as easy as possible by calculating your profits and expenses in advance every month.