Tax season is a busy time for freelancers, and knowing what to expect is essential. Having a good understanding of taxes can make it easier to file your return and claim deductions that may help you save money.
Freelancers must pay their self-employment taxes four times a year (quarterly). If you’re unsure how much to pay, refer to last year’s tax return or the IRS website for estimated tax rates.
Keep Track of Your Expenses
Tracking expenses is a vital part of business financial management. It allows you to keep an accurate record of where your money is going, which can help you determine if you’re on track for financial success or need to change your spending habits.
Knowing which business-related expenses you can deduct from your tax return is essential as a freelancer. This includes travel costs, equipment or supplies used for your business, health insurance premiums, etc.
Whether you use a tech-based expense tracking app or manually log your transactions in a notebook, creating a system that will be easy to follow is essential. Keeping a consistent and reliable log will give you a sense of where your money is going and ensure you don’t get confused or misguided about which expenses are deductible and which ones are not.
For the tech-savvy, several free apps will help you keep an up-to-date record of your expenses. These tools can save you time and stress when filing your taxes.
File Your Taxes Early
If you’re a freelancer, you know that tax season can be stressful therefore, you need guides for freelancer taxes. It’s a time when you’re focused on working, managing leads, and completing existing contracts while figuring out how much you need to set aside for taxes.
In addition to preparing and filing their taxes, freelancers often need to pay quarterly estimated taxes throughout the year to avoid large bills at tax time. Estimated payments are usually based on your income and expenses.
Freelancers should also keep accurate records of all business transactions, including invoices and receipts. This will make preparing your taxes more accessible and may help you find overlooked deductions or credits.
The time you need to keep your records depends on your industry, but generally speaking, at least seven years is required. This should give you enough time to track down any missing paperwork if you have to do an audit of your finances.
Hiring a professional to handle the process is recommended if you don’t have time to prepare and file your taxes. They can ensure that you take advantage of all available deductions and credits, reducing the amount you owe in taxes at the end of the year.
Don’t Forget About State Taxes
Freelance work is becoming increasingly popular. Many choose this career for various reasons, such as independence, new challenges, or finding a purpose.
But aside from getting paid by clients, freelancers also have to deal with taxes. The IRS classifies freelancers as self-employed, which means they’re responsible for paying federal and state income tax, FICA (Social Security and Medicare) taxes, and other fees and taxes that regular employees don’t have to pay.
A good rule of thumb is to pay the same taxes as you do in take-home pay. That way, you are not surprised when it’s time to file your taxes.
It’s also important to note that freelancers should file their income taxes in the state where they live, even if they work remotely for their employer. The state they live in is called their resident state or domicile, and the taxes they pay apply to all the income they earn there.
Many freelancers set aside money from each payment to cover estimated taxes. The amount they deposit depends on their income, federal and state income tax brackets, and tax deductions. A common practice is to deposit 25-50% of each freelance payment into a separate bank account.
Keep a Separate Bank Account
When tackling tax season as a freelancer, keeping your business and personal finances separate can be vital. This will save you time and help you file more accurate taxes.
It also helps you keep track of your expenses and deductions. For example, if you run an Etsy shop and deduct postage and shipping costs, you need to be able to show receipts that prove your transactions were business-related.
Having a separate bank account for your business can be a big time-saver during the tax-filing process, making sorting out your finances more manageable. And it will protect you from potential financial fraud.
Besides helping you organize your finances, a separate bank account will ensure you pay all necessary taxes on your freelance income. This includes paying estimated taxes and quarterly payments you send to the IRS and your state. You’ll need to set aside a percentage of your freelance earnings for these expenses, which will vary depending on your situation.
Also read: Complete Guide to Managing Remote Employees: Tips, Tools, and Best Practices