When you are filing your taxes as a freelancer, your net profit or loss is an important figure. The net profit or loss of your business is important because it is used in determining how much you will owe in self-employment taxes and plays a role in determining the amount of yearly taxes you will owe. Net profit is also important because it shows whether your freelance career is successful or not. If your freelance business is operating at a net loss year after year, you might want to look into what is going on.
With how important the net profit or loss is for your freelance business you want to make sure that you are correctly determining the numbers. Even a small mistake can cause a lot of problems because it can increase the amount of taxes you have to pay. Here is a look at the steps you will need to take to determine your net profit or loss.
Step one: Gross Profit
Your gross profit is determined by how much money your business has earned. How you track your freelance work is going to vary based on the sources you are using to obtain work. Some freelance websites provide their users with the appropriate tax information at year-end, such as a 1099. Others require you to keep track of all of the money that you earn on your own.
Step two: Business Expenses
The next involves gathering together all of your business expenses, which are considered your tax deductions. Some of the most common business expenses include office supplies, business equipment, utility bills, internet connection, and a home office. When gathering your expenses you want to make sure you have recorded copies of each expense, this is why keeping receipts is so important for tax purposes.
Step three: Determining Net Profit or Loss
The final step involves a simple amount of math. All you have to do is subtract your business expenses from your gross profit. Based on the number that you are left with you will either have a net profit or loss. If your gross profit is higher than your business expenses your freelance business made a profit. If your expenses are more than your gross profit, your business operated at a loss.
Whether you have a net profit or loss, once you have determined the correct amount, you will want to transfer that amount onto the correct tax papers. Freelancers at GetACoder usually focus on one area of freelancing, such as computer programming, which makes determining net profit or loss simple. Freelancers that have more than one area of expertise, such as article writing and computer programming, will need to determine their net profits or losses separately.
Sheila Homer is a married woman with five girls. She has worked in a variety of fields, including early childhood development and accounting. She graduated from the University of Phoenix with a Bachelor’s of Science in Business with a Minor in Accounting. Her education and career choices have helped her excel in freelance writing. Sheila first got involved in freelance writing because it allowed her to stay home and raise her girls, which she has been doing since January 2007. Sheila is one of several freelance writers on the GetACoder Blog team.