4 steps to prepare for taxes as an online business owner
Ohhhhh taxes! I know it’s something most of us only prefer to think about at tax time, but I have some news! Doing some pre-planning on this one and a few simple steps throughout the year is going to make tax time a lot less painful.
If you’re running an online business (and especially if you’re running an online business while traveling to multiple countries in a year!) things can get a wee bit complicated.
I’m not a CPA or tax advisor, but I have been around the filing taxes as an online business owner block for a few years in a row now, so I’ve gathered a thing or two. I hope for any newbies like me back in the day, this post really helps!
K so here’s your 4 steps!
Step 1: Figure out where you need to pay
This one pretty much applies if you move around a lot with your online business, if you stick to one country, you can totally skip this guy. But for everyone else who is in the same boat as me, who travels a lot and lives abroad most of the year, actually figuring this out can be pretty overwhelming. (Believe me, I get it, I’ve been there.)
Okay, so where do you pay your taxes? Again, not a tax advisor here, but I’ve generally gathered a few things:
Let’s say you’re doing the digital nomad thing and are hopping from country to country, never really getting a permanent or long-term visa, just visa hopping around the globe. (That is, staying as long as is allowed with a tourist visa, and then heading out to another country, or just doing a visa run to reset your time before heading back into the same country you were just in.) I’ve generally gathered from chatting to other digital nomads that in this situation, that these people generally just pay taxes to their home country. (Important note: These people have left themselves registered as a ‘permanent resident’ of their home country.)
If you’re more like me and have truly moved abroad for the foreseeable future, gotten a legit visa in another country (something other than a tourist visa) and have deregistered yourself as a permanent resident from your home country, you pay taxes to the country in which you got a visa for and are living in.
If you’re US American, you’re still going to need to file at home though too, because the IRS wants to know your worldwide income, regardless if you weren’t in the US at all that year. A lot of developed countries have something however called ‘double taxation agreements’ meaning if you have to file where you’re living abroad and at home in the US, you won’t need to pay taxes twice to two different countries, on the same income.
I hope those 2 options help you get a general idea for where you should be filing. I’ll just conclude this by saying that governments have absolutely not caught up with what digital nomads are actually doing, and the tax laws are very behind how modern businesses actually operate … So do the best you can.
And if you’re still not sure where to file, be sure to read step 4, cause that’ll help a bit more with this.
Step 2: Save the correct percentage for taxes
Who forgot about saving for taxes and just assumed all the money the business made after expenses was hers? This girl! 🙋♀️
(Btw Apple, I’d appreciate red head emojis so I can properly represent myself in emoji-form.)
As ridiculous as that sounds, it was the first year of my side-hustle, I had no clue what I was doing, clearly … 😂
Anyways, here’s some uber simple math to figure out what to save for taxes (aka taxable income):
Business revenue - business expenses = the amount you need to pay taxes on.
From there, you’ve got to figure out what percentage of tax you’ll be paying. This varies greatly depending on what tax bracket you’re in, marriage status, etc. I like to save on the conservative side, and if my tax bill is less than that, it’s unexpected extra money, which I then tend to drop on a conference.
Anyways, how much to save. This depends on where you’re paying taxes. In the USA/Canada if you save 20% of your taxable income, you’ll be well on your way to NOT having a heart attack come tax time.
If you’re in Europe like moi, we get to pay more, so I tend to save 30% of my taxable income. (Living in the continent where many countries offer free university, free health care, a year of paid maternity leave, almost-free daycare, uber comprehensive social systems and lots of pretty old buildings comes at a cost.)
(Again remember, taxable income is business revenue minus your expenses. Whatever that is, THAT’S your taxable income. If you save 20 or 30% of your total business revenue, you’ll save too much. Though your April-self will likely thank you for that mistake.)
If you have spaces in your bank account (like my fabulous bank N26 does) or have a separate account, move your taxes savings money into that other place. This will help you from falling in the veryyy common trap of looking at your bank balance, thinking you’re a boss with 20k in it… only to realize that you owe 25k in taxes and that you’re actually in the red.
If you don’t have spaces in your bank account or a separate account, keep a running tally going in a Google Sheet of what money in your bank account is taxes money, and think of that total as your new 0.
I do my bookkeeping once a month and then note down what is the amount from the month that’s being saved for taxes. You can do whatever frequency you prefer, the most important thing is to actually just pick a frequency.
Step 3: Keep a copy of all receipts
Don’t want to get taxed on ALL your revenue? You might need to prove your business expenses were actually business expenses. And in order to do so, you need a paper trail!
Here’s how we do things to make this as easy as possible.
Most things for the business are bought online and we tend to get emailed a receipt for the purchase or recurring payment in the situation of softwares. In Gmail, we have a label called ‘Income + Expenses’. All the money that comes in and goes out of the business for which we get an email gets labelled with this. (We’ve automated this a lot with Gmail filters.)
In the situation where I buy something and get a physical receipt, I take a photo and upload it to our Google Drive. In Google Drive I have a folder of physical receipts and inside that are folders for every month and year. I pop the photo of the receipt into the relevant folder. And then I’ve got a good old giant envelope where I throw the physical receipts too. (I have a different envelope for every year.)
Step 4: Find and speak to an accountant/bookkeeper/tax advisor and get advice well before tax season
The biggest pet peeve of accountants and bookkeepers? Trying to get in touch and hiring them rightttt around tax time.
Many tax advisors, accountants and bookkeepers won’t take on new clients in this time, purely because they can’t as they’re so busy with their current workload.
If you want advice (which country do I need to file in in my specific situation?) or want to hire someone on to help you with your finances or do your taxes for you, tax season is the wrong time.
So find a trusted bookkeeper, accountant and tax advisor in their off season. You’ll get a lot better service and attention.
If you did your bookkeeping yourself but plan on working with someone to actually file your taxes, it’s worth taking some time to sit down with them and go through your bookkeeping system.
When we do our own bookkeeping, we can totally butcher it (I know I did when I started) and it’s best for your accountant/tax advisor to spot these mistakes early and correct how you’re keeping track of things, and not leaving these issues to compound over the year and mean needing to re-do your entire bookkeeping for the year right around tax time.