The VICE Guide to Doing Your Taxes

Stressed about money? Systemic injustice, the wealth gap, and scarcity can all harm your physical and mental health. One way to change these systems is to grab the reins of your own financial resources, and one of the most powerful financial resources is tax strategy. 

Maybe my millennial is showing, but taxes are part of good self-care. Everyone knows there are penalties for paying too little in taxes, but paying too much hurts as well. It’s a sign you lack healthy boundaries and habits around your money. Paying less taxes isn’t cheating; it’s using benefits you are legally entitled to. And the best strategies involve structuring your business the right way and keeping yourself organized, so taxes are easier and you save as much as possible. 

So, as a small business accountant, I’m here to teach you the rules. This is a definitive guide to doing your taxes for freelancers and other “little guys” who want to win back some of their own time and money. 

Everything you do with money affects your taxes, so listing out your life events actually becomes a checklist to prepare for doing them. You need receipts and paperwork for all of it. Yes, receipts. A bank or credit card statement does not prove that Amazon charge was for a home office printer, and not an adjustable chicken harness. You don’t need paper receipts though. My favorite way to “file” is attaching a photo in a Google docs with the year, month, and a brief description in the title. You could do this in any note taking or digital filing system. 

You also need every W2, 1099, and any other tax document mailed to you. Equally important are the purchase documents for any asset you own, like real estate or cryptocurrency. Once your paperwork is organized, you can use the IRS's website to figure out what forms to attach to your tax return. Simply Google “IRS (description of event)” or “IRS (name of document)” Here’s what came up for “IRS getting married” and  “IRS 1099-K.”

Tax brackets typically refer to federal income taxes. Lower income families pay less tax. As your income grows, you owe a higher percentage on each tier of income. There are different brackets if you’re married or single, and tax brackets usually change every year. I like this Nerd Wallet article if you’re into dirty details and want to see tax brackets breakdowns. Otherwise, tax software or step-by-step instructions on IRS forms will do this math for you. 

Besides income tax, you might owe self-employment tax on your freelance income and state and local taxes. There is no way to know exactly how much you’ll owe unless you finish all your damn tax forms. But usually when people ask me “How much do I owe?” they really mean “How much should I save so I can pay on time?” You can do that one of two ways.  

Freelancers are told to save 15% to 30% of their income. That’s a big range. Knowing your effective tax rate is far more accurate. Start by finding the total tax you owed on last year’s tax return. On your 2021 personal tax return, your total tax appeared at the bottom of the Tax and Credits section on line 24. 

Next, find your total income. In 2021, this appeared in the Income section on line 9. 

Then, divide your total tax by your total income, and multiply that number by 100. That result is your “effective tax rate” or the exact percentage you paid last year in federal taxes. Use this percentage as your target savings rate. (41 states also collect state income tax. If your state does, do this same calculation with your state tax return and add that to your federal percentage.)

My favorite IRS tool is their tax withholding estimator which shows an estimate of the total tax you’ll owe. This calculator requires exact numbers, so if you don’t have your documents ready use option 1. 

You can lower your self-employment tax by deducting business expenses, but you can’t deduct everything. Business deductions must be “ordinary and necessary” for your industry. A good story about a Chanel shopping spree featured in a social media post won’t count.

Not to beat a dead horse, but this is also why you need those receipts. Trying to list a year's worth of expenses is exhausting and you’re guaranteed to miss something. You should record all income and expenses as they happen. A tool like Tiller will automatically pull all bank and credit card activity into a spreadsheet for you. It saves time and you can write off the cost. You’re welcome. 

A lot of people try to spend their way to tax savings. Yes, you can write off business expenses, however tax brackets mean you don’t save a dollar for every dollar you spend; you only save a percentage. You’ll still lose a whole dollar, and the most you’ll save is 37 cents. Besides, what we really all want is more cash. Luckily, the best tax strategies result in cash savings. They are A) pay all taxes on time so you never owe penalties or interest and B) save in a tax advantage retirement account.

Retirement accounts can feel just as overwhelming as taxes, but anyone can start a retirement account online in minutes with only a few hundred dollars. Plus you’ll be saving money on taxes while you build personal wealth. 

Tax services can cost a few-hundred to a few-thousand dollars, depending on how complex your return is. A service that expensive had better be damn valuable. Here’s some questions to ask yourself:

1) Is your accountant familiar with your industry? 

I once helped a yoga teacher whose previous accountant wouldn’t use the home office deduction for her studio. You know, the space she used for online yoga classes… which she charged money for… as a business… ugh! Each industry will have different ‘ordinary and necessary’ expenses to deduct. You want an accountant familiar with what has been historically allowed in your areas. 

2) Does your accountant ask lots of questions?

If your accountant doesn't ask probing questions, they are most likely missing deductions.

3) Do you feel confident DIY-ing this? 

Taxes are stressful and it can be worth paying for peace of mind. If you are a confident DIY-er, then you might need an accountant only for big life changes. 

My honest answer? If you’ve left your taxes to the last minute, use Form 7004 and file for an automatic tax extension. Then get honest about why you are in this position. Do you just need more time to organize? You deserve it! Use the extended time to get started. I’m cheering for you!

Still overwhelmed? Use the extra time to find professional help. If you can’t afford an accountant, the IRS provides free tax preparation services for the elderly, for persons with disabilities, if English isn’t your first language, or if your income is under $60,000 annually. 

Are you in a crisis or did a crisis result in you missing a tax deadline? Keep reading to petition for even more relief. 

A big tax bill can be a nasty surprise. If you don’t have the cash ready, you can apply for a payment plan from the IRS. There are also ways to reduce your tax debt, especially if you’ve had a legitimate life crisis, and there are services that can help. Do your research though, as there are many bad actors in that industry. This video from debt-relief specialist Logan Allec is a great place to start. 

For most of us, taxes will be your biggest expense over a lifetime and the most direct way you interact with the state. In addition to saving time and money, being good at taxes can have a large personal impact and really benefits your wellbeing.