Organizing For Self-Employment and Taxes

I spent this past week working on my taxes for 2020. I filed for an extension back at the first deadline. Everything was done, except for my crypto accounting. As the October 15 extension deadline loomed, it became more urgent to figure out a solution. Part of the problem is that I have used multiple exchanges, wallets, and platforms such as Hive. I have not found a crypto tax tool that suits my need until this week. Although this was by accident. Bear in mind that some of what I am suggesting here only applies to USA residents.

First, Bookkeeping

It is vital to have some form of bookkeeping to help keep your records organized. Software, such as QuickBooks or QuickBooks Self-Employed are a worthwhile investment. There are other software packages that allow you to do bookkeeping, perhaps at lower cost. However, you are looking at some friction in transferring your information to TurboTax or your accountant. While many accountants are great at their jobs, they are mostly familiar with QuickBooks. If you hand them some other format of information, you can expect some frowns.

Based on this, I would suggest the self-employed use a QuickBooks option for bookkeeping. At TravelWriteMoney, it is sufficient to use QuickBooks Self-Employed, which does simple bookkeeping for business and personal use. In our case, the advantage is the ability to enter mileage and receipts directly using the mobile app. Spare time waiting can be spent categorizing transactions.

Data entry time is saved by having QBSE automatically import transactions from banks. This too requires some compatibility. Not all banks work with QBSE. But, if needed, one can do a manual entry with scanned receipt.

QBSE mostly works to track important transactions. It is not as robust a solution as Quicken Home and Business, which includes managing rental properties and small business. These require a higher level of detail, which as a side-hustler, is not necessary for us. QBSE allows us to tailor our data throughout the year to prepare our taxes. In our case, it is a data funnel to the next step, which is tax preparation.

Speaking of Taxes

QuickBooks Self-Employed offers a tier of service for about $35 per month, which bundles it with TurboTax, making it possible to consult with an accountant throughout the year. If you keep up with your transaction categorizations, it offers the option to pay your quarterly estimated taxes. It is useful to pay quarterly estimated taxes as it eliminates the big surprise at the end of the year. Often, you can fit in some business expenses toward the end of the year that can lower your final tax bill, which you have mostly prepaid. So, you have a better chance of getting a tax return.

Our Particulars

QBSE would not be useful for you if you run a shop, have real estate, have investments, or own a corporation. QBSE is primarily useful for people like us here at TWM where we have day jobs and do side gigs like photography, computer repairs, consulting, ridesharing, and content creation. We just need a way to record and categorize business expenses without the burden of a full-fledged business. If your side gig requires you to collect sales tax, then QBSE tracks that as well for your quarterly sales tax filing.

If our circumstances change to where we have a business that is more complex than side gigs, we most likely would purchase a more comprehensive QuickBooks product for the business while keeping QBSE for personal and side gigs.

TurboTax does not rely solely on your QBSE data. It is more specialized to handle a majority of your tax needs. But, as a self-employed person, you are mostly tailoring your books to report on the IRS Form 1040 Schedule C form. Everything that can be deducted from your taxes has to fall within the following categories:

• Advertising
• Car and truck expenses
• Commissions and fees
• Contract labor
• Depletion
• Depreciation
• Employee benefits
• Insurance
• Interest
• Mortgage
• Other
• Legal and Professional services
• Office expense
• Pension and profit-sharing plans
• Rent or lease
• Repairs and maintenance
• Supplies
• Taxes and licenses
• Travel and meals
• Utilities
• Wages
• Other expenses

The goal is to fit your business expenses into these categories. There are also sections for calculating your cost of goods sold and itemizing your "Other Expenses". Given that you are targeting very specific categories for expenses to file your taxes, any extra reporting by accounting software is extra noise. This is why we prefer the simplicity of QBSE. The more complicated tax matters can be handled separately by TurboTax without the burden of having to figure out double entry accounting.

Professional Advice

For many years, we have relied on a CPA to help us prepare our taxes. Every year, we would have to schedule an appointment to go over details. It was roughly the same interview every year. We no longer have the CPA to assist us. However, QBSE has the Self-Employed Live Tax Bundle, which provides us access to a CPA all year to help if we need advice for next year's taxes. Paying $35 per month is a bargain for such access. Normally, $35 is not even the hourly rate for talking to a CPA.

And, if we need a bit more assistance, TurboTax also offers TurboTax Live Self-Employed with Full Service for an additional $290 annually. This level of service assigns a CPA to you to provide full service in tax preparation. This is, from my experience, a more than reasonable amount to pay for that level of service.

Finally, Crypto

We finally figured out the best way to report our crypto with the least amount of friction. We decided to use CryptoTrader.tax for our crypto tax accounting. It is another $99 annual cost. The main reason we settled on this platform is that it is one that works directly with TurboTax.

In addition, it is able to handle Uniswap transactions, which was a problem on other platforms. The only issue I have with CTT is that they do not include wallets. Therefore, transfers are unaccounted for, which bothers me because there are fees involved with transfers that are being neglected. But, for the most part, it is great in its simplicity. More importantly, the data enters into TurboTax quite easily, making tax preparation easy.

I was not able to directly import my @Blocktrades transactions into CTT. I had to manually enter them. However, it was a simple matter using the simplified template. The only problem was having to alter the time and date to UTC rather than local. Other than that, it was simple copy pasta.

Last Thoughts

Having gone through this experience for the first time without a local CPA, it helps in thinking ahead to the 2021 taxes. Here are some streamlining ideas I have:

• Use one credit card for all business expenses. Actually, I'll be shopping for a business credit card around March 2022.
• Limit crypto transfers to a few select exchanges that work well with CryptoTrader.tax. Or, limit transactions to platforms that provide workable exports.
• Keep up with crypto accounting throughout the year. I now have a system for this. Much of my hesitation and procrastination was due to not having chosen a platform.
• Upload important transactions to TurboTax as they occur. This makes it easier to find them when tax time rolls around. For example, I always lose charitable donation receipts.
• Schedule regular reviews with a TurboTax representative to make sure I am doing things correctly rather than wait until tax season when everybody is losing their minds.
• Scan more receipts. I am meticulous about capturing receipts at work. I should also extend this to my business expenses, which should make their way out of email into a PDF.
• Start taking some profit from content creation. My books look strange in that I am deducting expenses in fiat. But, there is no fiat income, only crypto income, which gets staked. I'll have to consult with the CPA.
• Get my taxes done early in 2022.

That's all for now.

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