How To Efficiently Plan your TAXES, Exclusive to Freelancers
Amazing Financing Tips exclusively for FREELANCERS/Self-employed folks. Here’s how you effectively plan your taxes
You know when your corporate job had it all sorted for you?
You miss that don’t you? And for those who haven’t started thier journey in freelancing yet, Let me tell you. There’s a whole world you will be living and building all by yourself.
Not to scare you, as much as it sounds exciting to quit your job and do Freelancing. It is extremely important to be well-informed before you begin.
You prepare before you leave for an adventure don’t you? You buy all sorts of equipment for the adventure, a drone a backpack, all the electronics, clothes etc.
Same with Freelancing, you need to Geer up, not only with the tools that the internet provides you with, bit also the knowledge before you actually begin.
Let me list it out for you, make sure you read the whole article because I promise you will logout with a treasure.
1) TAX
2) TDS
3) Basic Accounting
4) Do you need a CA or not?
TAX
-What section is applicable for TAX for the Freelancers?
It is the A44ADA section
-What is A44ADA?
So basically this is a section in the Govt documentation applicable for Freelancers who do not actually have a definite salary, or a stable source of income. It is made as ‘freelancer friendly’ as possible.
– How does it Help Freelancers?
Suppose you earn anywhere below the mark of 50 lakh per annum. 50% of your annual income will be presumed to be your survival amount including your business expenses and personal profits. The remaining 50% is where the TAX will be applied, before you come at me. No, not all of it will be taken. It means that the percentage of Tax will be applicable only to 50% of the annual income.
I’m trying to make it as simple as possible. Let me explain with examples below.
Assuming your annual income is 20 LPA right. In which 50% I.e. 10 lakhs of it will be taken to invest in business such as the new laptop, the software, the books, table, chair, a rental studio, Even the setup or new courses, it could be anything. Its up to you how you’d want to utilize the amount, even make profit with the remaining, these 10 lakhs, The Government will NOT touch.
Then the other 10 lakhs is where the percentage of Tax is applied, the percentage might vary on the amount you make, most likely it is 10% of Tax is applicable for the 10 lakhs. Now you have a profit of 9 lakhs after Tax deduction.
TDS
This is the amount, which in the end is all yours.
So to explain, it is the TAX that the receiver collects at source. The full for of TDS is TAX DEDUCTED AT SOURCE. For example they,
How to Reduce TAX deductions.
TDS or Tax Deducted at Source is the income tax reduced from the money paid at the time of making specific payments such as rent, professional fees, salary etc. by the persons making the payments. The person receiving the income is liable to pay income tax. But the government with the help of TDS provisions makes sure that income tax is deducted in advance from the payments being made by you at once. The recipient of income receives the net amount (after reducing TDS). The recipient will add the gross amount to his income and the amount of TDS is adjusted against his final tax liability. This helps the government to collect taxes in advance and track the transactions in an effective manner.
BASIC ACCOUNTING
1] Accrual Basis
2] Cash – based
Accounting is the most crucial step especially when you have a mismatch in adhering to the Criteria.
You can take help Accounting strategies of all the credits and debits in THESE TWO SCENARIOS.
A) If your expenses exceed the 50% mark of your annual income
OR
B) Your income is above 50LPA or 50 Lakhs per annum
In these cases, the rules will be customized with the help of a CA. and submit detailed Accounts for each expense the whole year. Here are some basic Accounting formats you can use to journal your expenses.
First is ACCRUAL BASED ACCOUNTING, Which will recognize revenue and expenses when they are generated and when they are actually paid. This means companies record revenue when it is earned by providing a service, not when the company collects the money.
For example, An interior design agency, has provided a service of 5 lakhs to a client in the month of November, But the client will be paying the amount in the month of December, so the amount will be documented for the month of November when the service was given regardless of have the cash received or not, to avoid confusion. In Accrual based accounting, here’s how you will document it. The amount to be paid by the client is called the Accrued amount or incurred amount until it is paid. Hence, Service given (Debit) =5 Lakhs, Receivables (Credit, Accrued in December)= 5 lakhs
So in this case your, debit and credit for the month of November will equalize and cause lesser confusions.
This type of Accounting format is helpful in large business where we have larger transactions.
In CASH -BASED ACCOUNTING, It is quite the opposite. You simply document the debit and credit on the basis of when the cash is actually Received. In reference to the above given example. The service given will be documented as Debit for the month of November, and the Credit in December.
This is most suitable in small business where there are smaller transactions.
DO YOU REALLY REQUIRE A CHARTED ACCOUNTANT?
A chartered accountant (CA) is a financial professional who is qualified to execute certain accounting procedures.
They mainly focus on the below mentioned areas.
- Taxation
- Management accounting
- Financial accounting and reporting
- Applied finance
You require a CA if there is a confusion for you to file your TDS, or you do not understand finance, You want to stay away from the TAX Gods and just want to be on time for the government rules so that you become a responsible citizen?
You need a CA if your business spectra is not compatible with the A44ADA section of Taxation.
A CA will be your Go-to for any queries and issues you’d have with the finance system so that you do not need to break you head and can just focus on doing what you love, growing your business, saving time etc.
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