Erica @ BMS Financial
5 Essential Tips for Keeping Track of Your Freelance Taxes
Freelancers, also called independent contractors, generally are considered self-employed by the IRS, so they're responsible for managing their own finances and filing their taxes on time. If you are a freelancer, keeping track of your tax obligations can be a bit overwhelming, but it can have serious consequences if you don't.
Successful freelancers keep accurate records of their income and expenses, pay their estimated taxes, understand their tax forms, and get help with their taxes. You could face penalties, fines, and even legal action if you don't. Proactively managing your freelance taxes will ultimately help you avoid unanticipated financial hits and ensure you are in good financial standing with the government.
Tip #1: Keep accurate records
It's essential for freelancers to keep detailed records of their income and expenses so they can file their taxes correctly. Keeping track of your income lets you budget and plan for estimated tax payments, preventing surprises.
Tracking expenses can also help you save on taxes by identifying legitimate tax deductions. If you keep thorough records, it's easier to justify audits, inquiries, or even if you're sued, the records will serve as adequate financial details for insurance companies, lawyers, or to attract investors.
Lastly, keeping accurate records saves you time, stress, and minimizes mistakes. You can track your income and expenses using Excel spreadsheets, accounting software such as QuickBooks Online, or by hiring a bookkeeper.
Whether you use paper receipts or electronic receipts after scanning them, independent contractors should review, organize, and backup their records regularly. You can have peace of mind throughout the year if you maintain an organized system for tracking your finances.
Tip #2: Make estimated tax payments
One of the challenges of being a freelancer is having to handle estimated tax payments. Self-employed people have to pay estimated taxes quarterly, since taxes aren't automatically deducted from their earnings.
Estimated taxes are calculated by estimating a freelancer's income, multiplying it by the federal and state tax rates, and splitting it into equal quarterly payments. Freelancers' estimated tax payments are calculated based on their projected income, minus any deductions or credits they may qualify for. Tax laws are complex, so freelancers often hire tax professionals to calculate their taxes accurately.
Failure to pay estimated taxes can result in a number of consequences. To start with, not paying your estimated taxes can lead to big penalties and interest charges. You'll avoid underpayment penalties by paying estimated taxes come April 15th. If you don't pay estimated taxes, the IRS may take your money from your bank account, or in extreme cases, freeze your assets. Also, a huge tax bill can add stress and delay bills, employees, or force freelancers into debt.
The best way to avoid these penalties is to make quarterly estimated tax payments, keep track of your freelance income and expenses, and seek professional assistance when necessary.
Tip #3: Know which tax deductions you qualify for
There are a number of tax deductions that are available for freelancers that can significantly reduce the amount of their taxable income. As a freelancer, you may be able to claim the following tax deductions:
Home office deduction
If you are a freelancer, you can deduct expenses for your home office like rent, utilities, and internet. To be tax deductible, the area designated as your home office must be used exclusively and regularly for work. Try to choose a room that can be closed off with a door or partition. In light of previous tax court decisions, you can be assured that your business can claim the room as a deductible expense.
Equipment and supplies
Computers, printers, cameras, and other equipment purchased for business use can be deducted as equipment expenses. Expenses like office supplies, books, and magazines related to the business can also be deducted.