What should freelancers know about paying taxes?
From setting aside about 25-30% of your income to hiring a CPA, here are 8 answers to the question, “As a freelancer, what is your best tip when it comes to taxes?”
- Set Aside About 25-30% of Your Income
- Receipt Keeping is Critical
- Familiarize Yourself With the Law & Be Punctual
- Maxing Out Tax Deductions.
- Track Your Net Income
- Stay Organized
- Have Automated Savings
- Hire a CPA Before It’s Too Late
Set Aside About 25-30% of Your Income
As a former freelancer, I’ve learned that taxes can be one of the biggest challenges you face. My best tip when it comes to managing taxes is to set aside about 25-30% of your income each month so that you have enough money set aside when tax time comes around. This has been absolutely essential for me in managing my finances as a freelancer, allowing me to set aside enough money for taxes without having to scramble come April 15. It makes tax season much less stressful and gives me peace of mind all year round.
Receipt Keeping is Critical
I take a digital photo of every receipt I collect as it relates to work-related expenses. Receipts mean savings and they can make a big difference. With every hotel stay, when you check out, make sure you get a printed receipt and a receipt mailed to you. You take that paper receipt and take a photo of it and store it in your phone. Then you stick that original paper receipt in a file. That’s three records for that one purchase, which includes two digital backups. It may seem like overkill, but you’re better off overdoing your record-keeping when it comes to receipts. Also, don’t just stash them away and forget about them until tax season.
Keep everything organized chronologically and keep them in a file that you can easily access. And be sure those digital files aren’t merely stored on your desktop or in your documents folder. Use applications like Dropbox and Google Drive so that you can access them anywhere in case your computer gets lost or stolen.
Familiarize Yourself With the Law & Be Punctual
People are often afraid to get into taxes since they can seem like a complicated deal. But it’s actually quite simple to familiarize yourself with how to utilize the system of taxes. First, I’d recommend informing yourself of your local and federal tax law, as well as potential privileges. After, you’ll want to be very rigid with paying taxes on time. That’s actually my best tip – be punctual with taxes. By doing so, you’ll allow yourself to steer clear of any tax-related danger, and you’ll build a healthy habit that’ll keep you on IRS’s (or your state tax authority’s) good side. Also, consider throwing a few bucks toward getting a good bookkeeper since that’s what’s holding everything together. At one point, it becomes too much for you to do by yourself, and making sure taxes are in order is mostly done through a bookkeeping associate.
Maxing Out Tax Deductions
As a freelancer, I’m always looking for ways to save money. One of the best ways I’ve found to do that is by maxing out my tax deductions. I know that in many cases, it’s hard to predict what your tax situation will be from year to year, but there are some things you can do to help you get more deductions. For example, if you have kids or dependents, consider a flexible spending account (FSA) so that you can pay for their medical expenses with pre-tax dollars.
If you’re unsure if an FSA is right for your situation or want advice on how to get started with one, talk to a financial planner or accountant. You can also deduct mileage when driving your car for business purposes—but make sure that’s the only time you use it! If you’re using your personal car for work too often, consider getting a second vehicle just for business trips and errands.
Track Your Net Income
As a freelancer, you are categorized as self-employed; hence you are subjected to self-employment taxes. This means that your taxes will be determined based on your income and is done on a business deduction basis, based on the nature of the services you provide. Tracking your net income gives you an outlay of what you owe the taxman and what you owe to yourself. Effective income tracking not only ensures that you pay legitimate taxes but also ensures that you have records when you get a tax refund claim.
My best tip when it comes to taxes as a freelancer is to always stay organized. Keeping track of your income and expenses is the key to staying on top of your taxes. Make sure to keep receipts, invoices, and other documents related to your income and expenses. It is important to stay organized when filing taxes as a freelancer in order to ensure accuracy and efficiency. This includes keeping detailed records of all income and expenses, as well as any business deductions.
It is also important to keep track of any tax documents or forms that need to be filed. Staying organized throughout the year will make filing taxes much easier and less stressful. It’s also a good idea to speak with an accountant to ensure that you’re taking all of the right deductions and filing your taxes correctly. An accountant can help you understand which deductions you are eligible for and how to maximize your tax return.
Have Automated Savings
Automating your savings can ease your life, as a freelancer, if you frequently forget to set aside money for expected tax payments. To ensure that money is consistently deposited into your savings account, you should consider opening a special savings account and setting up automated transfers. The money you require will be available when it’s time for your upcoming quarterly tax payment. My personal experience as a freelancer was significantly less stressful thanks to this one practice.
Hire a Cpa Before It’s Too Late
Hiring a CPA (Certified Public Accountant) might sound like a no-brainer tip for freelancers but far too many, including myself, wait too long before getting their affairs in order.
There are far too many tax-saving tips for the average freelancer to keep track of when their primary goal is to run their business in the first place.
LLC’s vs S-Corps, writing off dinners and office supplies, to even more advanced tax-saving tips like “The Augusta Rule”, is literally just the beginning of how a good CPA can help your business.
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