Tax season. Very few freelancers look forward to it, and do you know why? Mostly because they tend to be disorganized and leave taxes to the last minute.
They have to scramble to crunch all of their income sources, expenses, and worry if they’ll get audited. Sound familiar? Don’t worry. It’s more normal than you might think.
However, it doesn’t have to be that way. Imagine tax season being stress-free and completing them in a few hours. Don’t you want that?
If so, keep reading because we will be sharing 6 tips for doing freelance taxes you don’t want to miss out on.
Plan out all of your income and expenses ahead of time
The problem with rushing to do your taxes is that you may miss things and get audited later, owing more money. Not only that, but you also get very stressed out and anxious when it comes to filing tax returns in general.
You can avoid all of these problems by simply being organized. This means taking the time weeks to months ahead of time to map out:
- All of your income sources and placing them into a spreadsheet.
- Compiling all of your expenses, even if it’s a rough idea.
- Any new taxes you’ll have to learn like capital gains.
Even if you spend a little bit of time putting these pieces of information together, you can save hours and headaches later.
Consider incorporating to save on taxes
Most freelancers start out as a sole proprietor meaning they are their business. They are reliable for everything that happens to it and there is much more liability. Hence why incorporating can be very beneficial, especially when it comes to taxes.
When a freelancer incorporates, he or she is no longer connected to the business directly, reducing liability and risk. They are two separate entities. They are taxed much differently.
While you will still have to appoint yourself as an employee or shareholder and pay a salary or dividends to yourself, the money inside the corporation is typically taxed much lower.
For example, if you generate $100,000 in income as a sole proprietor, you’d be paying roughly $32,000 in taxes depending on your state. Nevertheless, a corporation would only pay around $10,000. That’s a massive difference!
Outsource your accounting if you can afford it
If you really want to kick your feet up come this next tax season, you should really consider completely outsourcing your taxes to an accountant. They’ll do all of the heavy lifting for you and take the burden off of your shoulders.
In fact, 60% of small business owners agree that they aren’t knowledgeable about accounting. A good firm will prevent you from making costly errors during tax season that can haunt you later.
Not only that, but they’re experts at what they do. That means they’ll find extra write-offs to save you money, recommend incorporating or not, and discover other ways to improve your tax returns that you might’ve not found by yourself.
Understanding what you can and can’t deduct
Tax deductions aren’t as simple as writing off every little expense you have with your business. There are very specific items and occasions that can be deducted, and often in only certain amounts. Here are some of the main write-offs you need to be aware of.
Do you drive around a lot of business? If so, your car payment and gas can be written off as an expense. However, you can’t write off the entire payment.
According to the official IRA website, you can only deduct the amount you use the car for business. This means going to the grocery store or visiting friends doesn’t count.
Furthermore, you’re also eligible to deduct interest and 75% of a lease payment. If you find yourself driving constantly to see clients, network, and other business-related activities, begin tracking how much you use your car for these things.
Grabbing dinner with clients is very common. It’s a great way to build a relationship, talk about business, and get to know one another better. Freelancers are also able to write off 50% of business meals, so keep receipts every time you wine and dine a client.
Working from home is amazing. But did you know that you could be writing off your home office for tax season, too?
There are many things like your computer, desk, phone, and other items in your office that can be written off. More notably, the depreciation of these assets can be deducted come tax season.
Ensure that you check with the official IRA or local tax website to see what amount you’re eligible for.
Internet and phone bills
Odds are if you’re a freelancer that you use the internet and your phone to pay the bills. Think about all of the client calls you’ve made and bandwidth you’ve used to work on projects.
Luckily for you, these are also eligible to be deducted. Similar to other expenses, they can’t be written off if you primarily use them for other reasons, such as surfing the web or social media in this case.
You need to get your business out there. This means you most likely invest in advertising. Whether it’s PPC ads or other strategies, your advertising costs can be completely written off in most circumstances.
Smaller fees like web hosting and domains can also be deducted if you have an internet-based business.
Save for tax season
Depending on your tax bracket and the type of business you run, it’s wise to calculate how much you’ll need to put away for taxes ahead of time. This prevents you from running into the problem of not having enough saved to pay your taxes and getting chased by the IRA.
Start saving more money by putting it away into a personal or business savings account. Use an online calculator to get a rough idea of how much you will be taxed come deadlines, and aim to have that number or more put away.
Go back to school
Knowledge is power. It’s also deductible. Tuition, books, courses, and other material that helps you become a better business owner is possible to be a tax deduction.
That’s why entrepreneurs should greatly consider going back to college, taking online courses, or simply purchasing a book that will help them with their craft.
These investments in your education will help improve your freelancing career and save more money come tax season.
Wrapping up our freelance tax tips
A lot of freelancers stress out about tax season and make it more difficult than it really is. However, you can be stress-free next time you do your taxes by using the tips we outlined today.
Firstly, ensure that you’re organized and prepared. If you have to scramble to find everything, you’re not going to have a good time. Plan out all of your income streams and expenses ahead of time with spreadsheets and physical receipts.
Freelancers should also consider incorporating to reduce risk and save money on taxes every year. Understanding what’s eligible for deductions, what isn’t, and how deprecations work will save you money, too.
Lastly, consider taking college classes, purchasing courses, or picking up a new business book to increase your business knowledge as they can all be written off.
Author bio: Carmine Mastropierro is a freelance writer who has written for Neil Patel, GoDaddy, SmartInsights, and other popular publications.