Experiencing your first tax season as a self-employed freelancer can be scary. You probably expect to owe a bunch of money to the IRS. The fear of the unknown, along with a completely new tax situation, can leave you worried and stressed.
But it’s not quite as bad you might think. After quitting my job in 2013, I was afraid that I too would owe a big tax bill. But I actually received a refund on my taxes! Even when I was working as an accountant I never recieved a refund during tax time. So this was quite a surprise.
Here are the steps I took to receive a refund on my taxes, and what you can do to prevent getting stuck with a large tax bill this year.
1. Use a Tax Checklist
Getting organized is the best way to ensure you don’t end up paying more taxes than you should. You want to have an accurate record of all business-related expenses, equipment purchased, and any other credits that can help reduce your overall tax burden.
Start your tax filing process with a simple checklist to make sure you don’t leave anything off your return. Having your tax return handy from last year will help too. I actually created a free tax toolkit for readers who sign up for my monthly newsletter, but you can also create one of your own using a piece of paper or spreadsheet.
It’s easy to forget that you purchased a new printer, or pay for a monthly freelancer subscription, so be sure you have some sort of record. You’re already paying more than your fair share of taxes as a self-employed contractor, so don’t cripple yourself even more by forgetting a qualified business expense.
2. Know Your Tax Deductions
As a freelancer you’re entitled to a few more tax deductions than the average employee. If you use your car for business, you can deduct the gas, oil changes, and maintenance expenses. If you meet clients for coffee, you can deduct that under “meals”. You can even take a portion of your rent, utilities, and internet costs if you have a dedicated home office for your business.
Talk to a tax professional to verify your personal situation and all the tax deductions you qualify for. Some other lesser-known credits include paying your own health insurance and any unpaid invoices for client work.
For a complete list, check out what’s listed under the expenses section of a Schedule C and check off any deductions that match what you spent.
3. Make Quarterly Tax Payments
Landing a big client with a large payout is awesome for your bank account, but not so cool when it comes time to pay your taxes. As a self-employed worker you’re responsible to pay Self-Employment tax (SE tax) on all income you earn throughout the year.
You’re also required to pay taxes on the income as it’s received, meaning you have to estimate quarterly tax payments and pay them to the IRS. Think of it like just another bill and set aside a certain percentage of your revenue each week, or each month, and put it into a separate savings account.
How much should your payments be? Generally speaking, it’s smart to set aside at least 20% and as much as 40% if you live in a state with high income taxes (like California for example).
So if you bring in $3,000 this month you’ll multiply that gross figure by 20% which equals $600. Transfer this amount to a separate savings account and then make a payment out of this account each quarter to the IRS.
What’s another way freelancers can lower their tax bill? How do you make sure you pay the least amount of taxes?