Before you do anything (like taking on clients), you’ll need to form a legal business, which matters in part because your structure determines how you’re taxed. Freelancers often open LLCs, which can protect your personal assets from business debt.
Next, test-drive accounting software (I like QuickBooks Self-Employed and FreshBooks.) Pick one that creates functional invoices, makes inputting expenses easy, and is in your budget.
Now you’re open for business! Every expense you incur—from software to coffees with clients—goes in the software. Every dollar you earn, too. Keep receipts for everything. As you correctly surmised, expenses ≠ write-offs. Simply put, write-offs (aka deductions) are ordinary and necessary costs to your business. Photoshop? Yep. A Manet for your home office? No.
Truth is, it’s not that simple. There are special rules for deducting startup costs. You might need to make estimated tax payments quarterly. And we haven’t even talked about tax credits.
Bottom line: If taxes are the 4×100 relay, you’ll run a great first leg by keeping really good track of your income and expenses. Let a tax pro take it to the finish line for at least the first couple of years.
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