Did you know that the average American pays around $5,000 in taxes every year? While the exact amount depends on income and various other factors, it’s important to do what you can to save money.
Self-employment taxes can be especially complicated. If you don’t know exactly what you’re doing, then you could end up losing a lot of your hard-earned cash.
Are you trying to better understand the IRS regulations in this area? Keep reading to learn 5 tactical tips for filing your freelance taxes.
1. Stay Organized
One of the best tax tips involves having your ducks in a row. Taxes are complicated as it is, but if you don’t organize and keep track of all your paperwork, then it could turn into a nightmarish problem.
If you have clients paying you $600 or more, then it’s crucial to receive a 1099-Misc or 1099-NEC form from them.
In the United States, Form 1099-MISC stands for “Miscellaneous.” It is used to report miscellaneous income made to others during the course of doing business. Form 1099-NEC stands for “Nonemployee Compensation.” It is a form that businesses use to report payments they make to people who aren’t their employees.
You should also log all your income and business-related expenses in a spreadsheet. Don’t forget about paystubs either, which are record of any payments made to employees.
2. Set Reminders
Taxes as a freelancer can creep up on you out of nowhere. It may seem like an obvious tip to keep track of tax due dates, but if you slip up even once, then you’ll find yourself scrambling to get things done. That’s when major mistakes can happen.
Plus, you’re going to have to pay taxes every quarter rather than once a year, which makes the dates that much more important.
3. Lean on a Professional
When it comes to tax tips for freelancers, you shouldn’t be afraid to get help. Just because you’re your own boss doesn’t mean you have to get lost in the tax labyrinth.
There’s a reason that accountants go to school to learn the complicated world of taxes. With this in mind, you can make your freelance job a whole lot easier if you hire a professional.
One thing that you might find helpful is to hire a bookkeeper to track and categorize your expenses. This person will review every single one of your financial transactions (expenses and income) and categorize each of them, so that things are easy come tax time.
If you want to take advantage of the shared economy, Bench.co is a great bookkeeping company that combines booking software with a personalized account manager for a low monthly fee. In addition to categorizing your expenses, they will prepare important financial statements for you, like your Profit & Loss (P&L) statements and Balance Sheet.
Or, you can step it up a notch and hire an accountant, either as to act as consultant when you have questions or to file your freelance taxes.
4. Dive Into Deductions
If you’re still wondering how to do taxes, then you should pay attention to what’s deductible and what isn’t.
It makes sense to write off a computer and internet service, for instance, but should you write off a business meal? In fact, that’s a common deduction.
On top of that, how should handle travel? What about business mileage? How about charitable contributions?
A professional can help you sort all of these items out.
5. Retirement Contributions
While there are both advantages and disadvantages of contributing to a retirement account, one of the perks is that many of these contributions will secure you a tax break.
For example, contributions to a 401(k) or Traditional IRA will lower your total taxable income. The same is true for a SEP-IRA plan (Simplified Employee Pension Plan).
The exception to this is the ROTH IRA, which won’t get you any upfront tax advantages. However, with this type of retirement account you won’t owe any taxes on the gains when you withdraw your funds in retirement.
Ready to File Your Freelance Taxes?
Now that you’ve learned five practical tips for filing your freelance taxes, you can get as much money back as possible. That way, you can invest it back into your business or use it to grow your net worth.