Are You Ready? How to Prepare Your Teaching Business for Tax Time
How much do you think you need to earn to file an income tax return in 2017? It may surprise you to know that as a self-employed private instructor, you only need to have a profit of $400 to file a tax return*.
If you’ve left everything to the last minute, then don’t panic (too much). I spoke to Susan Lee, who has prepared taxes for freelancers and artists in New York City for more than 20 years, to get a little advice on preparing yourself for that 15th April tax deadline.
“Keep really good records.”
You need to keep solid records of your outgoings as well as your income so you know how much you actually made during the financial year. It’s time to gather all of your receipts and invoices to work out what you can and cannot deduct from your business.
As a freelancer, no one takes the taxes out of the money your earn — it’s up to you to report your income to the IRS. So, you need to make sure you have all of your records to hand.
That can be quite a lot of paperwork — here’s a full list of papers you will need to do your taxes.
“Track your expenses.”
You can use a range of mediums to keep track of your expenses. Whether it’s an old-fashioned ledger, an Excel spreadsheet or an app-based tracking system, it doesn’t matter. But you do need to record your income and outgoings into that system.
“Keep paper receipts.”
We may live in an increasingly digital world, but it’s important to print out and retain paper records. “People, wrongly, assume that an electronic receipt will last forever, it’s much safer to print out a hard, paper copy of your receipts — and any other paperwork,” according to Susan.
It is also worth getting a dedicated bank account and/or credit card for your business. This will make it easier, going forward, as all of your business transactions can be tracked using your statements from these accounts.
“You have to keep track of your income and outgoings so you know what you can deduct.”
Keeping every receipt means you can evaluate whether each outgoing can be claimed as an expense. It’s an important task. This will help you to determine your net taxable income.
It’s worth keeping such paperwork in a separate folder for each tax year. Also, remember to keep your paperwork for up to three years after filing a tax return as they can still be contested or amended during this time.
What can you deduct?
This is a basic list of typical expenses incurred by self-employed private instructors:
- Office supplies
- Travel expenses
- Book, magazines, reference material — including sheet music
- Telephone/internet
- Marketing materials
- Office rent
- Membership of professional organizations
- Business insurance and legal/professional fees
- Travel expenses
- Business meals and business entertainment
- Equipment — including your instruments and any replacement parts
- Software
Susan said: “It can be difficult for private instructors. There are a lot of different outgoing on a day-to-day basis.” For example, you may have to travel between lessons, or pay to rent out a classroom. Your teaching location can also play a part if, for example, you conduct lessons at your home or in a separate studio.
The diversity and flexibility of private instructors means your finances may be equally diverse. If you keep clear records and track your expenses, this time of year shouldn’t case you too much stress.
Susan Lee has prepared taxes for freelancers and artists in New York City for more than 20 years. She is a Certified Financial Planner™
*Susan said: “To be clear, this is not true of the group of people who call themselves freelancers and who are paid on W-2’s. It is true for the freelancers who get paid for the whole amount they earn, do not have any taxes withheld, and have or should have their income declared on a 1099.”
