There isn’t much to dislike about a freelancer’s work style. You can work from home, pick your own hours, name your price, and much more. However, all of this independence also comes with deciding how your taxes are handled. Many freelancers handle their own taxes to save money and minimize the risk for audits at the end of the year.
If you’re looking to get started off on the right foot with your taxes, this is a great starting point for handling your taxes independently and successfully.
Document Every Expense
When it comes to business expenses, many freelancers often find themselves scratching their heads and wondering what exactly is considered an expense. As a point of reference, you should be documenting expenses such as: your monthly internet bill (if your trade is online-based), equipment used for work, travel costs, meals eaten during business affairs, conference costs, expenses associated with health insurance, and more. Try to be as specific as possible. It will matter when the time comes to determine your dues and profit.
For more information about what constitutes as a business expense, check out this article from the IRS.
Keep Track of Your Earnings
This seems like common sense, but if you’re receiving constant payments from clients, it can become difficult to keep track. Keep a detailed record of all checks, cash, card payments, or PayPal cash you are given. If you don’t already do so, consider sending invoices to your clients before receiving payment from them. This will make your reporting more accurate and more importantly, stay organized on monthly payments.
Reserve 25% of Your Payments
For each payment that you receive from your clients, it’s a good rule of thumb to reserve at least 25% of the entire sum. This will help immensely when the time comes to pay taxes on your earned income.
Shoot for Quarterly Payments
While we’re on the subject of actually paying off your taxes, try to get into a habit of paying in quarterly rather than annually. You’ll only get one 1099 form per year from each client, but you can run rough estimations according to these numbers on what you would owe on a quarterly basis. IRS recommends this and we do too!
Depending on your trade, your taxes could be rather complex. Whether you do your taxes alone or get help from a professional, nothing beats preparation to keep your tax dues to a minimum.
This article is sponsored by Abajian Law, a tax litigation firm in Glendale, CA.