It’s the time of year when the floor of my office is covered with bits of white paper, dinner and the dishes get neglected and my accountant wonders how close to April 15 it’ll get before he hears from me.
Yep, it’s tax season.
I’ve spent the last three days finishing tallying up my income and expenses to have everything ready to send to my very patient accountant who’ll give my calculations a once over before filing my return with Uncle Sam.
Though taxes are something you have to do, they also should be something that you want to do in order to get better insights into how your freelance writing business is operating.
Here’s what I learned from crunching the numbers on my 2011 taxes:
1. Beware big clients. In 2011, my income dropped 3.5 percent from the previous year, a direct result of my largest client cutting back the amount of work they assigned during the second half of the year and not being able to make up all the difference from new work. The good news is I picked up two new clients in the second half of 2011, and that big client started assigning again, so by the beginning of this year my work load is about where it used to be, but my client portfolio is more diverse, always a good thing.
2. The only thing that matters is the bottom line. At the same time my gross income was down slightly, my total business expenses were up about 33.5 percent, mainly because of higher travel expenses (more on this below). Because of the increase, my expenses were about 9.8 percent of my income, compared with only 7.1 percent in 2010. Since I’m anticipating gross income to remain relatively unchanged this year, I’m already taking measures to cut back on business expenses so they’re closer to the 7 percent mark. On a side note: I’d love to hear from other freelancers if your overhead is similar to mine: is 7 to 10 percent typical for you? As a side note: isn’t it great to be in a business with a pre-tax profit margin of 90 to 93 percent?
3. It pays to travel (a little). In 2011, my biggest expense was travel. I made five trips out of the state last year, twice to cover conferences or conventions for work, twice to meet with editors or writers I work with, and once to run a panel at the American Society of Journalists and Authors conference in New York. Total expenses for airfare, lodging, transportation (taxis, shuttles, subways, parking, etc.) was approximately $4,850. I was reimbursed for about 40 percent of that, but the balance – about $2,950 – was still more than three times what I spent on travel in 2010. I won’t cut out travel altogether – I’ve already taken a trip this year that was partly work related. And I’m a firm believer in visiting editors at least once every other year. But I canceled plans to go to ASJA again this year because last year it was one of my most expensive trips and I got zero work out of it. Although I love going to New York and had fun meeting writer friends who I’d only known virtually before, I can’t justify spending that kind of money. I am thinking about attending the Online News Association convention next September in San Francisco because it’s so much closer to home.
4. I spend more on Internet services than on the telephone. And that includes minutes and texts on my Droid. My costs for monthly Internet service, hosting for my website, website design, domain name registration and inflight or hotel Internet service was about twice as much as what I paid for local, long distance and cell phone services. I think that’s a first.
5. I don’t eat out. In 2011, I spent a whopping $108 on business-related meals and entertainment in town, $433 if you include meals I had on business trips. That’s one advantage of not working in coffee shops – those $3.50 lattes add up. Think about it – even if you worked just 1 day a week at a Starbucks or similar coffee shop and spent $5 on coffee and a donut, that’s $260 a year.
6. I splurge where it counts. What I don’t spend on business lunches, I more than make up for paying for professional services, specifically the accountant who double and triple checks my tax return, and on media perils insurance, which covers my editing, writing and blogging.
7. Major expense categories don’t change much from year to year. In 2011, my top 10 business expenses were: travel, professional services, dues and subscriptions, computer hardware, Internet services including website design, office supplies, telephone services including cell service, books and periodicals, software, and mailing. In 2010, my top expenses were in the same categories, just shuffled around a bit: professional services, telephone and cell service, Internet services including website design, computer hardware, dues and subscriptions, travel, office supplies, miscellaneous expenses, books and periodicals, and software.
8. It pays to wait. In 2011, I bought a new computer, for the first time in at least four years (or five, I forget). The monitor I’d been using was even older – a label on the back said, “Manufactured in 1995” – almost as old as my college freshman – yikes! The silver lining in waiting was being able to buy a state-of-the-art all-in-one computer with the latest bells and whistles – touchscreen, fastest Intel processor on the market, 1 terabyte of storage, HD TV screen, etc. – for well under $1,000.
If you’ve done your 2011 taxes already, what insights into your freelance business did you gain, and what will you do differently this year as a result?