Virtual Assistant Tax Tips
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I have a confession.
Get ready… ’cause it is a good one.
I. Hate. Budgeting.
For real, y’all. I am naturally NOT a numbers person. I dropped out of calculus to take business math in high school and never looked back.
So when my bookkeeper (the amazing Melissa Whaley) came into my life – she was like the peanut butter to my jelly.
So, without further ado…
Get ready for the best virtual assistant tax advice you’ve ever received.
I’m super excited to be sharing with you today an interview with my friend and bookkeeper, Melissa Whaley (melissawhaley.com). Melissa is a CPA who specializes as a virtual tax adviser and strategist for business owners – particularly, online and creative business owners.
Here’s a little bit of background on Melissa: She began her career in taxes almost nine years ago when she landed a job at a retail tax chain. She was trained there, learned the ropes under some awesome mentors, and ultimately fell in love with taxes. (She knows that’s a super weird thing to say!)
She loves helping business owners with their taxes since she comes from a family of entrepreneurs. She enjoys breaking down taxes for those who feel like taxes are scary. When it’s not tax season, she helps people sort their finances and plan for the future. She lives in California.
» Watch the interview here:
Here are the questions I covered in the interview!
Q: What should a new Virtual Assistant know about taxes and bookkeeping before getting clients?
One of the most important things you need to know when starting your business is that you should be tracking EVERYTHING related to your income and expenses.
It doesn’t matter how.
Whether you write your income and expenses down with pen in a paper ledger or you have a professional accounting software, track everything! (I really can’t say it enough; this is the most helpful thing you can do for the financial health of your business.)
The second, equally important thing you need to know is that when you are a virtual assistant or any other type of freelancer, you are self-employed and responsible for 100% of your taxes.
There are no taxes taken out for you from your employer. There is most likely going to be a tax bill due at the end of your first year. It is now your job to plan and prepare for your own taxes.
Side Note: I highly recommend a plan to accommodate your taxes into your rate. This is the exact reason why I recommend NO LESS than $20/hour, but I’m really more comfortable suggesting around $25 or $30. After taxes and expenses, that rate doesn’t actually work out to a high profit per hour.
Still on the fence about what to charge?
Watch this video to determine your rates:
Q: What else should a Virtual Assistant be doing as their business GROWS in terms of keeping track of income and expenses?
A great and really easy thing to do is to open a separate bank account for your business. It doesn’t have to be a “business” account if you’re not an LLC or incorporated yet.
If your business is just you operating as a sole proprietor, open a second checking account and run all of your business transactions through that account first. This strategy will help you keep your expenses and income separate from your other finances.
Another benefit of a separate account is that even if you don’t keep track of anything all year long and tax time arrives, you can print out 12 months of bank statements to use as a reference for your taxes. You can compile the statements into a binder and employ a highlighter to separate income and expenses for the whole year.
Q: When a Virtual Assistant lands their first client, is there any documentation the VA should be giving that client (or should the client be giving us something) for tax purposes? What can you tell us about taxes and clients?
Before we get into specifics, it’s important to note that you are legally required to report all income on your taxes.
A tax form called a 1099 is used when a business-owner pays another business (a Virtual Assistant, for example) for services totaling more than $600 in a calendar year.
A business owner is required to send that business a 1099 at the end of the year. A 1099 is NOT a W-2, so it won’t have taxes taken out. A 1099 is simply a way for the IRS to track who’s paying who.
If you get hired by someone, they will most likely request your W-9. A W-9 is an information form. It tells your client what your legal name is, what your legal Tax ID is (SSN or EIN), address, and how you file your taxes. A majority of freelancers still file as a sole proprietor.
A sole proprietor means your business taxes are not separate from your personal taxes. Everything is compiled on to one big tax return, and there are different forms and sheets to include for your business that feed into your personal tax return.
Psssttt… You can find a blank W-9 here.
For tax time, if your client pays you more than $600 over the course of a calendar year, they will send you a 1099 form that reports your income. (The W-9 helps them do that.)
But if you do not get a 1099 from a client, you can’t exclude their income. You are legally required to report all income regardless of whether you get a 1099 or not.
Keep track of your own income. Your W-9 DOES require either your SSN or EIN, so unless you want to be giving your SSN out to all of your new and existing clients, then get a free tax ID number for your business. You can apply for an EIN here,
If I’m a Virtual Assistant or any other type of freelancer, and I get a new client, I send my client a W-9 (information form with SSN or EIN). At the end of the year, if my client pays me over $600, they send me a 1099. I’ll use the 1099 form on my taxes to report my income.
Side note: If you are a Virtual Assistant and you work for someone outside of the U.S., they are not going to send you a 1099 form. If you hire someone outside of the U.S., there’s a different type of form you need to file. The advice given in this interview and blog post is for U.S. citizens hiring and working with other U.S. citizens. If you, your client, or your subcontractor are not based in the U.S., please speak with a CPA in the relevant country.
Q: What are some big mistakes you see online business-owners making when it comes to tax planning?
Let’s list them out:
The biggest mistake I see business-owners making when it comes to tax planning is not tracking anything financially throughout the year.
The lack of tracking becomes a huge, stressful thing when it comes to taxes because then business owners are trying to dig through this business bank account, that PayPal account… It helps so much to track consistently throughout the year.
Another mistake I see is people who have profitable businesses and don’t set anything aside for taxes.
A profitable business could be defined as you’re able to pay some bills with the money you make in your business. It breaks my heart when we get to tax time, and a person is excited they made $30k in their business over the year. But they didn’t save anything for taxes.
There’s a higher likelihood you will owe money on your taxes if you have a profitable business.
It’s not a guarantee that you will owe money because everyone’s taxes are different, but remember to set aside money for taxes. Nothing hurts more than having a big tax bill at the end of the year but no money in the account to pay for it.
It’s hard to say how much you should withhold for taxes because everyone’s situation is a little bit different, but you are going to have to at least pay self-employment tax (which is 15% of your profit). Your income is defined as how much you brought in from clients, minus your expenses. The bottom line is your profit, and you’re only taxed on your profit.
If you set aside at least 15% of your profit, that will help you save for tax time. Pad your account with another 10% to ensure you have enough cushion to cover ALL taxes, like income tax, state tax, or really high tax situations (like California).
Side Note: I personally tell Virtual Assistants to save back 25% – 30% of all money they make. (That number might cause you to re-evaluate your rates!) If you have 30% saved, you won’t have stress around tax time. If you’re keeping track of your income and expenses, it’s unlikely you’ll have to pay more than 30%. The great benefit of this system is you’ll have extra money at tax time if your bill isn’t quite 30%, which can be a pleasant surprise! That’s like an annual bonus at tax time because you won’t have to send all your money to the IRS.
What are quarterly taxes? At what point in my business should I be filing quarterly taxes?
Quarterly taxes are pre-payments into your taxes.
Our tax system in the U.S. is a pay-as-you-go system. Even though we only file our tax return once a year, we are supposed to be sending our tax money in throughout the year. If you’re employed and have a W-2, the money is taken out by your boss and it’s your company’s job to do the quarterly payments and send in the taxes for you.
When you’re self-employed, it’s YOUR job to send in the taxes yourself once a quarter. You make a pre-payment on your taxes once a quarter so that when you file your taxes, the goal is to not owe the IRS any money. If you do owe money, according to the IRS, it is supposed to be less than $1,000.
You need to start paying quarterly taxes when you’ve had your business, filed a tax return, and actually owed money when you filed your taxes.
That means that if this is your very first year in business, you don’t need to pay quarterly taxes yet (whew!).
Not everyone is going to automatically owe once they start turning a profit from their business. There’s a lot of different factors that play into people’s taxes. Your tax situation changes from year to year. But know that if you’ve filed your taxes and there was money owed to the IRS, that’s the immediate signal that you need to start paying quarterly taxes.
If you were supposed to pay quarterly taxes but didn’t, you won’t be in legal trouble, but you will have to pay a penalty fee. If you owe more than $1,000 when you go to file your 1040 annual tax return, you will have an underpayment penalty. The IRS will penalize you for not paying throughout the year.
The underpayment penalty is not a high amount, but it is money you should NOT have to pay the government. As long as you pay the full amount due when you file your tax return, you’re good until the next year. You should probably avoid paying extra money to the government, but they’re not going to come after you for not paying quarterlies as long as you pay all taxes due at your annual tax return.
What kind of tax-advantage retirement account can you open as a sole proprietor?
There are some awesome retirement options available to you as a self-employed person as opposed to a traditional employee. For starters, anyone can open an individual Traditional Roth IRA and put in a maximum of $5,500 a year. When you’re self-employed, there are additional types of retirement accounts you can set up.
- Solo 401k – You can set this up with an investment advisor.
- SEP IRA – You can put in up to $55k per year.
- Traditional – The money you put in now offsets your taxable income. It is non-taxable. The money is taxed when you take it out.
- Simple IRA – this one is better if you have employees and a matching program.
When you start making your business your full-time income, you should seriously consider opening a retirement account. Your retirement is not set up for you by your company. If you know you’re going to have to pay taxes this year anyway, throw some money into an IRA. That will help reduce your tax bill overall, and you’ll be paying yourself instead of the government.
Overview of benefits of opening an IRA today:
- It helps you on your taxes now.
- You’re paying your future self.
What are the tax benefits of becoming an LLC?
There are no tax benefits. An LLC is a legal entity, not a tax entity. You’ll file your taxes exactly the same.
For tax purposes, all freelancers (including Virtual Assistants), are sole proprietors – even if they have filed as a single-member LLC.
What are some write-offs that we may forget about during tax time? What CAN and CANNOT be written off as a business expense?
In the Virtual Assistant and online business world, the core of our expenses are software, equipment, and general office supplies.
Yep, that means that your pretty new pink and fuzzy office chair is a business expense (score!).
Online courses, digital products, and software for your business is a write-off.
Anything you’re purchasing to improve yourself as a business owner or to grow your business is a tax write-off. This might include group programs, 1-1 strategy sessions/coaching, e-books, PDF guides, $7 downloads, etc.
One thing we might forget to look for are apps on our phone that we use for business. Apps can be a one-time download fee or a recurring subscription – a lot of hidden expenses end up here.
The other one we tend to overlook is the Target or Walmart run when you purchase something cute for the office or more pens and supplies.
You can write off things that you buy on your personal card, as well. To make this piece a little easier, you can do two transactions in the checkout lane at Target or Walmart. Use your personal card for one transaction and your business card for the other.
Re: Meals and entertainment – If you’re going to work at Starbucks by yourself, you can’t write that off.
Eek. This may have put a damper on your mid-day coffee runs…
But meals and entertainment ARE deductible if you’re meeting clients, going to networking events, OR if you’re co-working with other people and buy a meal (especially if you buy them coffee or lunch).
Keep track of the full amount you pay for the legitimately deductible meals – you can write off 50% of the total amount you spent. (You can write off the meal you bought your client, but technically not the meal you bought for yourself.)
What can we write off for business travel?
When you’re traveling outside of your home-base, travel is 100% deductible. Meals, hotels, flights, Ubers – however you get to where you’re going and what you spend while you’re there – are 100% deductible. (However, you can’t take your family to Disneyland to “meet a client” and write it off on your taxes.)
If I made less than $600 with a client, do I have to report it?
YES. You don’t have to file a 1099 form if you don’t have one from your client, but you have to report ALL income. It’s your responsibility to track your expenses, track your income, and claim it all on your taxes. 1099 forms aside, that’s your job. It’s nice to have an accounting system like FreshBooks or Wave, because it allows you to have your invoices and payments in one place.
If you have subcontractors that you pay over $600, you have to give them a 1099 form if you use cash, check, or direct deposit to pay them. PayPal’s friends and family feature is also counted in this rule.
(Check out Melissa’s blog post about the muddy waters of 1099s here.)
If you’re using PayPal, always document that the transaction is for goods and services. It adds PayPal protection so you can go through the dispute process, if necessary. There’s no protection on PayPal’s Friends/Family feature. If you’re trying to avoid fees by using the Friends/Family feature, you’re not going to get the PayPal dispute protection.
What about SSI tax?
SSI stands for Supplemental Security Income, which is social security tax. Your tax rate as a business-owner is 15%. You pay into the social security system through your self-employment tax.
At what point should we hire a CPA or a tax person to help us prepare our taxes?
Well – of course I think you should hire Melissa right away : )
The bottom line is if there is a point where you are trying to self-prepare your taxes and the tax software is asking you questions and you have no idea how to answer them, then you should talk to someone (regardless of whether you own a business or not!).
There are always times you should consult an expert over the DIY method. This can save you money in the long run. If you’re working on your car and trying to figure it out with YouTube, but they’re saying words and you don’t know what they mean, it’s time to take it into a mechanic.
People’s fear when hiring a tax person is that it’s going to be expensive. It doesn’t have to be. Prices vary like crazy depending on where you live and what type of office you go to. It’s perfectly okay to talk to a couple of different tax people and find out what each person’s fee is.
You have to ask yourself, how important is this to you?
Do you really want to screw up on your taxes?
Consulting a tax expert is an investment. If you have a fear that you’re going to mess it up, it’s good to talk to somebody.
When filing your taxes, do you only claim the amount of your profit?
You need to input ALL of your income (gross revenue). Your actual tax return will calculate all of the expenses for your business and adjust your taxes accordingly.
The form you fill out for your business expenses is called a Schedule C.
Claim all your income, and deduct all your expenses. You can have a profit or loss. It’s okay to have a loss on your business. But the IRS doesn’t know you had a loss unless you file a tax return.
If you do claim a loss on your business (and if this is your only job), then you can not claim certain deductions, like the child care credit.
If you’re at home, the perspective of the IRS is you could have been watching your own kids since your business didn’t make money. There are credits you don’t qualify for unless you have positive income.
What if you take business calls on your personal cell phone?
This is a gray area, for sure. Five different tax agents will give you five different answers; three different IRS agents will give you three different answers. If you can document what you use your cell phone for, you can deduct it as a business expense. Melissa recommends NOT deducting more than 50%.
If you use your phone more than 50% for business, maybe you should consider a separate business line/ business phone. If you have a separate phone for business, a) you can set really good boundaries, and b) you can write off the actual phone cost and the monthly phone bill 100%.
Do I need to set up an LLC right away or do I need to get more established and have more business income?
An LLC doesn’t change your tax status at all. Legally, an LLC protects your personal assets. Since this is outside the scope of the interview and Melissa’s expertise, you’ll need to talk to a lawyer for legalities concerning your business.
» For answers to this LLC question and more, check out this interview I did with Businessese attorney, Danielle Liss.
Can I write off Paypal or Wave fees?
Some people only claim the income that comes into their bank account and they don’t claim the money that they’re actually invoicing minus the fees. If you’re having fees taken out, claim them on your taxes. Claim the full invoice amount.
For example, if you invoiced $1000 and had $10 in fees, claim those numbers. Don’t leave those expenses hanging; they can add up to a lot over the course of a year.
If you want to find Melissa or hire her to do your taxes, you can find her at her website melissawhaley.com. She also hangs out on Facebook (facebook.com/melissawhaleytax/) and Instagram (instagram.com/melissawhaley).
If you’re listening and taking notes and still trying to decide if a VA business is right for you, download the VA Starter Kit and Checklist. It’s a step by step checklist for launching your business!
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