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Show me the money – Part 2 September 4, 2008

Posted by Jill (@bonnjill) in Business practices.
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Just in case you missed it, my post entitled “Show me the money” has generated quite a few hits and inspired several good posts on other blogs. Most notable is The Masked Translator’s post today on taxes, “Crappy paperwork and the ideal accounting software for translators.” MT makes a very good point that you “should count the number of hours [you are] putting into tax-related crap, multiply this by [your] hourly [rate], and if the amount was greater than what [you] would pay a CPA and/or bookkeepers to handle the stuff, [you] should switch over,” following it up with the very wise words: “…you should always farm out tasks you do not enjoy as a freelancer to keep your job as fun as possible.” Later on in the comments MT states that “No freelancer should be doing business if not incorporated as an S Corporation or a single-member LLC.”

Yeah, I know. I just haven’t gotten around to incorporating… and if I am doing my job correctly I should not get sued. I think errors and omissions insurance is a waste of money for that very reason. There has only been one documented case of a translator being sued for an error, and a good proofreader would have caught the mistake. I have most of my work proofread by a colleague before delivering it to my client (and I do the same for her). But I digress… I want to focus on taxes. E&O insurance is another post for another day.

I do most of my bookkeeping myself, but hire a CPA to do my taxes. It may sound weird, but I actually enjoy doing the bookkeeping. Being the daughter of an accountant I keep meticulous records, and it only takes me about an hour to prepare my stuff for the CPA. However, it is important that you understand the tax system so that you can check and verify the CPA’s work. My CPA screwed up last year and added $4,000 of capital gains from someone else to my income. Luckily I caught it, and he had to fix it a couple days before Tax Day. It saved me from having to pay several hundred dollars. Instead I got a small refund.

I’m not saying everyone should adopt my system, but for those of you just starting out or looking for a quick system this is how I handle my bookkeeping. I use an Excel spreadsheet for my invoices (one spreadsheet for each tax quarter – 2008-1, 2008-2, etc.) and copy or write the job info with all the pertinent information (PO number, file info, word rate, etc.) on the worksheet as soon as I accept the job. I copy and paste worksheets from previous jobs for the same client so that I can ensure all the information is included and is consistent. Once the job is finished I enter the final word count, copy the worksheet into a new Excel spreadsheet, delete the extra worksheets, save the file (invoice_jsommer_2008-123.xls) and then convert it to a PDF (invoice_jsommer_2008-123.pdf), which I then send to the accounting department’s or project manager’s e-mail address (I have my client’s specified e-mail addresses saved in my e-mail address book with the alias “invoice@clientsname.com”). As soon as I send the invoice I then enter it into MS Money as a new deposit and specify the due date. I also put a little x in the top left-hand corner of my ongoing quarterly Excel spreadsheet indicating I have submitted the invoice. It sounds more confusing than it is.

In addition to an Excel spreadsheet for my invoices, I maintain a separate Excel spreadsheet for my quarterly income (one worksheet per quarter) that I use to track payments as they come in (if they are in euro I convert them according to that day’s exchange rate and enter the total in the dollar column) and automatically add the dollar column up for a quarterly total. I take the grand total for the quarter and multiply it by 20% for my quarterly estimated tax payment [=SUM(C42*0.2)]. I usually don’t owe any taxes this way and have gotten small refunds the past two years (just the way you want it – why give the government a non-interest-bearing loan when you can keep it in the bank for yourself?). In late February/early March I print out the four “quarterly income” Excel worksheets and my Tax Report from MS Money and pop the MS Money back-up file onto a memory stick for my CPA.

I have gotten to the point where I am considering becoming an LLC and hiring a company to do all this for me though. I just need to find the time to actually do it…

And special thanks to Sarah Dillon for her post “Making sure you get paid: part II.” It’s nice to hear my ramblings helped inspire someone to change their system. That made it all worthwhile!

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Comments»

1. MT - September 5, 2008

Thanks for the mention of Masked Translator. 🙂

Seriously, though: get set up as an LLC tomorrow. It doesn’t cost that much, doesn’t change anything (much) about how you do your taxes or keep records, and it protects your car, home, and other assets. A single-person LLC continues to use a Schedule C on federal taxes, and you are still considered a “sole proprietor” (the IRS uses the term “disregarded entity,” meaning you don’t pay corporation taxes). In a lot of states you can incorporate online or on the phone.

Also, consider this: liability as a translator does not exist solely toward your clients from your translations, and if your terms of business are written properly you haven’t given your clients much if any recourse to sue you for errors, etc., anyway. You run the risk of liability in other ways, too, e.g. inadvertently violating confidentiality agreements or spreading computer viruses, etc. If your computer or backup drive get robbed or hacked, your clients’ confidential information could be compromised, too. Yes, I know: it all sounds like an episode of “24,” but these things do happen every day in the news.

Also, many times, lawsuits are motivated by the potential for monetary gain. If you are an LLC, there’s not much they can get out of you. (If you have liability insurance, however, some would argue that’s like asking for a lawsuit.)

-MT

2. Corinne McKay - September 5, 2008

I know we’re not supposed to be focusing on incorporation (oh wait, now I can write a post about incorporating!), but I have an S-corp and it has saved me a lot of money in addition to the liability protection. With an S-corp, you can legally take part of your income as salary and part of it as corporate profit, and you don’t pay self-employment tax on the portion that you take as corporate profit. So for example if you pay yourself 60K total, you could take 30K as “salary” and 30K as “profit,” which would effectively save you from paying self-employment tax on half your income.

I think MT makes a good case for the LLC too, and I believe that LLC is less paperwork; S-corp requires you to pay payroll taxes every quarter.


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