It’s that time of year again… the most dreaded month of my year: tax season.
However, it doesn’t have to be that complicated. Check out these tips from a post I wrote for Same Day Translations on freelancers and taxes. There’s a lot of things here I wish I’d known before becoming a freelancer (like estimated tax payments for example…)
Tips for freelancers to simplify the tax filing process:
- Get help from a tax advisor who knows their stuff. Even a one-time consultation can drastically simplify the process. Additionally, investing in tax preparation software will make filing your taxes much easier.
- Use a separate bank account for your business – as well as a different credit card. I’ve tried it with and without and, trust me, the benefits are worth the hassle of opening a new bank account (and it’s not even that hard!) This will make it easier to track your income and expenses, something you’ll need to know when you take business expense deductions.
- Pay taxes quarterly. Many freelancers don’t realize until it’s too late that if their employer isn’t withholding taxes from their paycheck, the IRS requires quarterly estimated tax payments to be made. These payments count toward your total tax liability at the end of the year, and the amount due is based on your projected income. If you don’t make the quarterly payments, you will have to pay a penalty and interest at the end of the year when you file your taxes. Here are some more details about estimated tax payments.
- Set aside a percentage of your income specifically for taxes. Just as your employer would withhold taxes, set aside an amount equal to or higher than what you expect you’ll have to pay. That will make it easier to make the payment at the end of the year (no big tax returns for freelancers!) Remember, not only do you pay income tax, but also an additional 15% for self employment tax (which covers the Social Security/Medicare taxes that you would pay if you had an employer).
- Get health insurance, and set up an IRA. In many cases, health insurance premiums are tax deductible for freelancers, and most IRA’s are set up so that you don’t pay taxes on the money you put in until you pull it out. That will help you save on taxes in the short term and set up your future in the long run. While health care and retirement savings may seem extravagant for a beginning freelancer’s budget, both are important benefits that can save you a lot of money long term.
- Work professionally. This might seem a little weird in a post about tax preparation tips, but actually treating your work like a professional business will help you (and others) take your business seriously. Set up a home office space used exclusively for business (that’s a tax deduction!) Get a business phone number, manage and schedule your work time, attend conferences and events in your field of expertise, and try not to work in your pajamas too often… Maintaining a professional attitude toward your work will help you feel more confident and less stressed during the difficult times of freelancing. Plus, you’ll feel a little better writing those IRS checks if you can see measurable evidence that yes, you are a working professional.
Thanks to this post here for the ideas included above!