7 Freelancer Tax Tips To Stay On Top Of Your Accounts

Freelancers need a lot of discipline to be successful. You are in control of your own hours, your own income, and of course, your own taxes. Many freelancers will find leveraging accounting software to track your income and expenses not only simplifies tax filing but also provides a clear view of your financial health each month and each tax year.

“Most online tax filing services will allow for federal tax returns to be filed completely free of charge, while typically charging a small fee of $14.99 for state return filings. While it is wise to always execute caution in regards to filling out personal information online, most secure and reputable tax filing services will only work with state tax department websites and irs.gov data pages,” says Jake Hill, CEO of DebtHammer.

Tools like QuickBooks, FreshBooks, or even Excel can help you monitor cash flow, making tax preparation less stressful and more accurate. What’s more, many of these tools provide a clear breakdown of your taxes for each financial year, making submitting your tax return a far less daunting prospect.

Maintaining separate accounts for your personal and business finances is crucial for having a simple process of income and expenses when you come to file your taxes. This separation of your business spending from your other, everyday spending, not only simplifies bookkeeping, but also provides a straightforward audit trail for the IRS if they ever want to take a deeper look into your accounts.

As Justin Rush, CFP, told me, "While it seems simple, not many freelancers actually do it. Having a separate bank account for your freelance activities makes it that much easier to track expenses and income. The better separation you have between personal finances and business finance, the easier it will be come tax time."

When I first started freelancing in 2017, this was advice that I definitely should have followed! The first year I had to file my own freelancer taxes, I spent hour upon hour separating personal expenses and income from business transactions. It is not worth the hassle - use a dedicated business bank account and credit card to track all your business-related transactions.

A common pitfall for freelancers is failing to reserve a portion of income for taxes, leading to a financial strain come tax season.

A good rule of thumb is to set aside 25-30% of every payment you receive into a separate savings account designated for taxes. This proactive approach ensures you're prepared for tax obligations without dipping into personal funds. It can be difficult to have the discipline to put that money aside and not touch it, but get into the mindset of that money not belonging to you - it’s the government’s. Hands off!

The IRS requires freelancers to pay estimated taxes quarterly if you expect to owe $1,000 or more when your return is filed. Failing to do so can result in penalties, so don’t neglect this responsibility!

“Many freelancers forget that you need to "pay taxes as you go" throughout the year. Each quarter they should be making an estimated payment or else they'll be hit with unexpected penalties when they go to file their tax return. An extra tip? Make payments unique every time so that you can track which payment was made for which part of the year”, suggested Justin Rush.

Estimated tax payments cover income tax and self-employment tax and help spread your tax burden throughout the year, making it more manageable.

"I’ve known a few people who didn’t realize they had to pay quarterly estimated taxes as a new freelancer, and that really hurt them when tax season rolled around because they owed additional fines", says Carter Seuthe, CEO of Credit Summit.

While your tax savings sit in an account until you need to file them, consider using a high-yield savings account to earn interest.

This won't make you rich, but it can slightly offset your tax expenses or cover a part of your tax preparation fees. Just ensure you have easy access to these funds when your tax payments are due. This is an easy way to enjoy a little perk of being responsible for putting your own taxes to one side.

As well as earning interest on your tax savings, you could be saving for retirement. As Christian Putnam, CPA, at Augur.cpa explained, “In contrast to employed individuals, freelancers have more options for making tax-advantaged contributions to a retirement savings account. Freelancers can set up and contribute to a SEP IRA before April 15th. The maximum contribution is 20% of their net freelance income, which could provide for a larger contribution than contributing to a regular IRA.”

For freelancers, deducting business expenses is a powerful tool to lower your taxable income. It can feel daunting when you’re first starting out, but to simplify it, simply consider any cost to you as a result of your business.

“Freelancers have a unique position to leverage various tax deductions to lower their taxable income. Key deductions include the home office deduction, business insurance premiums, self-employment taxes, retirement savings, and qualified business income deduction (QBI). Freelancers need to understand each deduction's specific requirements and ensure you're eligible to claim them. The best option is to consult with a CPA or tax practitioner to assist them and guide them,” says Johan Garcia, CPA, from After Tax Cash.

Track everything from home office costs, software subscriptions, and business travel to education expenses. The key is ensuring expenses are ordinary and necessary for your business - depending on your industry, these things could vary quite significantly, so consult with an accountant if you’re not sure.

Staying diligent with record-keeping can significantly reduce your tax liability, so it’s worth getting clued up in this area.

Many individuals start their path as an entrepreneur as a sole proprietor. In many ways, it’s the most straightforward option when you’re just getting started with self-employment. However, as your business grows and expands, your choice of business structure (sole proprietorship, LLC, S Corporation, etc.) could have significant tax implications.

For instance, forming an S Corporation might offer significant tax savings on self-employment taxes as you begin to move into a higher bracket of net profit - though it does come with its own set of rules and obligations to master.

“Electing to be taxed as an S Corporation, for instance, can sometimes lead to significant tax savings by allowing the freelancer to split their income into salary and dividends, potentially reducing self-employment taxes.

However, it's crucial to consult with a tax professional to ensure this strategy is beneficial for your specific situation, as it involves more complex compliance requirements”, explained Dennis Shirshikov of Awning.com

If you think you might be in a position to move your business into an LLC or S Corp structure, it's worth consulting with a tax professional to determine the most beneficial structure for your freelance business.

The main thing to remember when it comes to your taxes as a freelancer is to stay organized. If you're finding the process daunting, don’t let it fade away into the background until you suddenly have a week to sort through a year’s worth of accounts.

Instead, set aside a meeting with yourself every month to go through your income, expenses, and how much tax you need to set aside that month. Do this religiously - and soon enough, navigating taxes as a freelancer will be second nature to you.