So you finally quit your day job and are now your own boss. You call the shots and have complete control over your time.
Things are going great! And then tax time rolls around. Eeeek!
But before you panic and freak out, we’ve got 3 simple steps to help you as a freelancer conquer your taxes.
1. Keep Track of What’s Coming In and Going Out
If you don’t know what’s going on in your business, no one else will. So as a self-employed freelancer, you’re responsible to keep track of what’s coming in and going out. This can be broken down into two main categories:
Income from your business. You no longer have the luxury of depending on an employer to provide you with the end of year tax info. So it’s solely up to you to keep track of the revenue your business brings in. Yes, you will get 1099s from your clients, but for the most part your income will be based on revenue receipts and statements.
Expenses for the business. You want to qualify for ALL the tax deductions you’re legally able to claim. No one wants to pay more taxes than they have too! For this reason, it’s vital you carefully record all your expenses related to business transactions, and especially keep good records of any equipment you purchase and travel expenses.
A simple way to keep track of both your income and expenses is to use financial software like Mint, LearnVest or Outright Bookkeeping. They offer both free and paid options depending on the complexity of your business. If you need help with payroll and other more in-depth features, you could consider Quickbooks online.
2. Pay Quarterly Taxes
This is probably one of the most alarming situations a freelancer faces when they complete their first self-employed tax season. You could be stuck with a huge tax bill, and a large penalty on your tax return, if you don’t pay your taxes on a quarterly basis.
Why? Because the Federal government requires that all taxes be paid, and collected, at the time the income is earned. This is why your employer withholds taxes from your paycheck every pay period, and sends payment on your behalf.
Additionally, as a self-employed freelancer, you are responsible for your own portion of Medicare and Social Security tax, whereas your previous employer paid half of these taxes.
All of these SE taxes require payments called QET’s or quarterly estimated taxes, which you pay on the 15th of the month following your last quarter. Generally speaking, you can calculate your estimated taxes by using a round figure of 15-25% depending on your tax bracket.
However, if you want a more accurate calculation you can fill out Form 1040-ES, or you could pay for the premium version of one of the bookkeeping services I mentioned above to calculate the taxes based on your gross income throughout the year.
3. Know Your Tax Deductions
By understanding all the tax deductions to which you’re entitled can help you pay a lot less money in taxes — which means more money in your pocket to help your business grow.
Many of the most relevant tax deductions for self-employed business owners include; healthcare costs, home office deductions, business assets, travel expenses, office supplies and more. Even little things like business cards, repairs for your computer and interest paid for business loans are tax deductible.
In order to keep it simple each year, and avoid missing deductions you could claim, make a list of all your expenses as you go along. Then at the end of the year check off the ones that you’ve accounted for, before heading to the CPA.
To make it simple for my clients and my fellow freelancers, I created a simple Self-Employed Tax Checklist that you can download for free.
As a freelancer what’s your number one tax tip?