Whether you are a freelancer or a small business owner that manages your business affairs, you need to file taxes. First, you need to estimate your taxable wages before submitting them to the IRS or tax department of your country. Then, you can be sure that your hard work is represented accurately by the tax authorities. Primarily if you work on projects and have an hourly rate to measure your work, the demand for invoicing and time tracking software is imperative. By using one, you will be able to track your billable hours. The calculation of your work will form your taxable wages and by extension your tax payments. It will also help you get paid accurately and manage projects. But first, let us start with the basics.
What qualifies as part of taxable wages?
Basically, it is the total amount of worked income that the government thinks is fit to be taxed. Also known as gross income, it includes deductible items and services, not yet deducted. The IRS is the one responsible for adding or taking off deductions for every tax year.
A company’s gross income consists of wages, bonuses, and commissions among other kinds of remuneration. After all the costs, expenses, deductibles, and taxes are subtracted from the gross income, the amount left is called net income and signifies business profit.
How to achieve optimal tax wages tracking?
The principle you need to be focusing on is the concise time tracking of your work. Combined with a standard set of hourly rates, depending on the project, you will know your work’s worth. Having full control of your time will help you structure your financial data and tax filing.
The process of time tracking your work is something that should be done without a second thought. There will come a time when you need to know how much you have worked in order to form your taxable wages. Of course, your taxes will also include other forms of income like rent payments and investments amongst others.
By using time-tracking software, you can mark your time entries as billable or non-billable. This way, you will receive payments for your billable hours and study your non-billable hours to improve efficiency and revenue.
The importance of accurate taxable wages
Keeping up with your business finances seems like a simple matter. However, practically, it is not. It requires discipline, organization, and of course the help of technology. On top of this, taxes are parts of your income that the government gets hold of in order to provide taxpayers with specific services and benefits. The procedure of doing federal taxes is much more demanding for self-employed professionals. They are responsible for accurately tracking their income before submitting their taxes. They also have to file quarterly payments to the tax authorities in accordance with that income. On the contrary, regular employees only have a part of their salaries withheld by their employers for taxes.
Cost estimation and the actual hourly rate
Concretizing your income implies that you have already set hourly or fixed project rates, and you have clients to pay for those rendered services. As discussed in a previous article, apart from your hourly rate, you need to define the actual hourly cost of your services. Generally, your working rates should be sufficient to cover expenses, project costs as well as generate profit. The outcome of your calculations will have an impact on your income estimation and taxes.
However, if the costs for running your business are minimal, then you do not need to drastically adjust your hourly rates to encompass costs as well. Then, you would just need to estimate your ideal amount of yearly income while keeping in mind the taxes you need to pay back. The % varies per country, but in the case of the U.S, it is around 30% (15% self-employed tax/15 % for income tax). You would also take into consideration the calculation of total worked hours (billable and non-billable), and the weeks you will not be working due to possible health issues and vacation time. So, the hourly rate you will be charging your clients will have to be equivalent to the hours worked. Then, you will be able to achieve the ideal net income, calculate your tax burden, and keep your profit, without forgetting holidays and sick days.
In a nutshell…
…the better the calculation of taxable wages, the more secure you will be when filing your taxes every year. Of course, you should always put aside some funds for the expected tax burden you will have to pay. All of the above would get much harder without the use of software for tracking billable hours and expenses. Plus, you will be losing the chance to monitor costs and analyze financial reports.
If you are in need of help to file your taxes, find an expert accountant, knowledgeable in your country’s tax laws but also create a free account to facilitate your work and start tracking your business course.