7 Ways a Freelancer Can Manage Their Taxes Like a Pro
When tax time rolls around, it is different for freelancers. Small business owners, independent contractors, and gig workers fall into the same tax category – self-employed.
Individuals who receive a W-2 only need to file their taxes once a year before the deadline. Employers handle the rest. That’s why it seems easy.
Employers send quarterly estimated taxes to the Internal Revenue Service on behalf of their employees and themselves. Plus, they send social security payments and other fees to the appropriate government agency.
Freelancers take care of their tax responsibilities including sending quarterly estimated payments and social security. In terms of social security, keep in mind that you’ll pay two portions, freelancer and employer.
Tax time is rightfully a stressful time for freelancers. No one wants to attract an audit. However, once you master the process, it becomes easier.
The following are seven ways a freelancer can manage their taxes like a pro.
1. Keep Accurate Records
First and foremost, start by keeping accurate records. Keep track of your earnings and expenses. These records become crucial for claiming the deductions available to freelancers.
Some tax deductions include:
- Home office expenses
- Internet expenses
For every deduction you claim, ensure that you have the paperwork to back it up. Then, keep the receipts together with your tax return for at least four years.
2. Establish a Second Bank Account
Financial experts in the tax field advise freelancers to save 30% of their earnings. This amount should cover all taxes including social security payments.
An easy way to set aside your estimated quarterly payments is to deposit the 30% you save in a second bank account. The second account helps remind you that the contents have a specific purpose so it’s hands-off otherwise.
3. Pick Your Tax Entity
Most freelancers decide to operate as sole proprietors. Others go all-in on their business and pick a partnership, limited liability corporation, or corporation.
The entity determines how the Internal Revenue Service taxes you. It also determines the tax forms you will fill out.
These entities determine your personal liability in case you face a lawsuit too. Therefore, it’s a good idea to become familiar with the essence of each.
4. Estimate Your Quarterly Taxes
Freelancers who believe that they will earn over $1,000 in any year must pay estimated quarterly taxes. Since no employer withholds your taxes per paycheck and sends them to the IRS, the responsibility falls on your desk.
The IRS offers a helpful guide. They also outline the appropriate forms to fill out and how to address them for proper routing.
Failing to send these payments will result in penalties.
5. Understand the Rules
Tax laws change annually. The United States government and Internal Revenue Service make slight tweaks that don’t impact everybody. But major changes take place every few years.
The American Tax Code fills several volumes of books. Unless you’re a tax professional, no one expects freelancers to understand it in its entirety. However, it helps to know the basics that apply to you as a non-employee.
This allows you to avoid surprises such as unexpected penalties.
Services like Gigly offer legal and financial resources to help freelancers manage the administrative aspects of their business. Remember, in the eyes of the IRS, a freelancer is a self-employed individual. By extension, you own a company.
6. Obtain Software
A great way to handle taxes like a pro is to obtain software. Several versions of helpful software exist.
For example, you can acquire tax software. Another option is to obtain bookkeeping software that handles invoicing and integrates tax aspects. It makes compiling financial reports easier.
Moreover, you can acquire customer relationship management software. This version helps freelancers manage their sales pipeline and integrates invoicing and taxes.
The trick is to find software that fits your field and scale.
7. Hire a Tax Professional
If you find that keeping track of your tax liability is too time-consuming or challenging, it’s OK to hire a professional. Some freelancers run financially complicated businesses. Therefore, they require the help of professionals.
In many cases, the IRS allows individuals to write off professional accounting services fees.
The more a freelancer prepares for tax time, the easier the process goes. By staying organized throughout the year, you can make your estimated quarterly payments to the IRS. Plus, you can settle up your tax liability more easily once a year.