Freelancers often face a particular issue with taxes. They don’t have the luxury of an employer taking care of all their records and making sure they pay all that they owe. It’s up to them, the self-employed freelancers, to do it all themselves. Fortunately, there are several steps you can take to keep track of your finances and make things easier for when it’s time to file your tax returns.
Whether you freelance full-time or part-time, here are some suggestions on how to manage your finances as a freelancer:
Avoid Underpayment Penalties
The IRS charges an underpayment penalty if you don’t pay enough to cover your taxes during a tax year. The penalty can be up to 25% of what you owe, so it’s important not to underestimate your yearly expenses! In particular, freelancers often fall short when estimating their quarterly taxes.
Keeping good records and being as accurate as possible will ensure that you avoid making mistakes and being penalized for them. Alternatively, you can pay a penalty for underpayment if you don’t have to pay any taxes during the year. If you’re still unsure how much should go towards estimated taxes each quarter, talk with someone else who was self-employed before. This person can help give you a realistic estimate based on their own experiences.
Have Your Taxes Done Right
Freelancers need to be careful about how they handle their finances. If you get someone else to do your taxes for you, you might end up losing your refund or even owing money at the end of the process. Make sure you’re aware of what you can deduct and how much will go into your pocket at the end of a tax year.
Even if a professional does do your taxes for you, knowing what financial documents are essential is fundamental. The most important document for a freelancer is the 1099 form detailing how much you made as a non-employee throughout the year. Having this on hand makes it easier to file your taxes and keep track of what you’ve been paid.
Pay Estimated Quarterly Taxes
If estimated tax penalties are something you’d rather avoid, consider using an electronic payment system to pay quickly and efficiently throughout the year. You still have until each deadline date to submit these payments, so you don’t have to rush or risk making an error.
As a freelancer, you must take the proper steps to keep your finances in good shape. Paying attention to everything from your tax deductions to your estimated quarterly taxes might seem intimidating at first, but having a plan in place will make it easier for you to stay on track.
Beware Of Tax Scams
As a self-employed freelancer, there’s always the risk that someone will take advantage of your unique financial situation. Unfortunately, there are countless scams out there that will try to trick you into paying for services or giving up critical financial documents.
If someone contacts you claiming to be from the IRS and demands payment, hang up! The IRS will never call you on the phone demanding immediate payment like this. Instead, if they want your money, they’ll send you a letter in the mail first.
Stay aware of any potential scams out there; don’t give out your Social Security number or other personal information unless it’s necessary. Instead, protect yourself by only giving these details to the individuals who are trustworthy enough to deserve them.
Avoiding Self-Employment Tax
Self-employment tax can be a huge hit, so being aware of avoiding paying those dues is essential. One way to do this is by having another company classify you as an independent contractor rather than an employee – something that’s generally up to them, not you.
If they’re hiring freelancers, this typically won’t fly; however, if they hire someone else who works with outside help (like an advertising firm or PR agency), they might consider hiring you as a contractor and not paying self-employment tax on your earnings.
If it sounds like there are many details and hoops to jump through, that’s because there are! This isn’t the most effortless process, but if you’re careful and ask the right questions upfront, you’ll get through it. It can be frustrating, but don’t give up – you’ll save yourself a lot more money in the end by doing your taxes yourself than trying to get someone else to do them (and possibly mess something up).
Following some simple advice can help reduce tax time for freelancers to focus on their careers instead of worrying about their finances. Whether you’re filing your taxes yourself or hiring someone else to do it, knowing the types of documents that are important and what financial deductions for self-employed freelancers might apply can help streamline the p