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  • Writer's pictureErica @ BMS Financial

5 Essential Tips for Keeping Track of Your Freelance Taxes

Freelancers, also called independent contractors, generally are considered self-employed by the IRS, so they're responsible for managing their own finances and filing their taxes on time. If you are a freelancer, keeping track of your tax obligations can be a bit overwhelming, but it can have serious consequences if you don't.


Successful freelancers keep accurate records of their income and expenses, pay their estimated taxes, understand their tax forms, and get help with their taxes. You could face penalties, fines, and even legal action if you don't. Proactively managing your freelance taxes will ultimately help you avoid unanticipated financial hits and ensure you are in good financial standing with the government.

 

Tip #1: Keep accurate records


It's essential for freelancers to keep detailed records of their income and expenses so they can file their taxes correctly. Keeping track of your income lets you budget and plan for estimated tax payments, preventing surprises.


Tracking expenses can also help you save on taxes by identifying legitimate tax deductions. If you keep thorough records, it's easier to justify audits, inquiries, or even if you're sued, the records will serve as adequate financial details for insurance companies, lawyers, or to attract investors.


Lastly, keeping accurate records saves you time, stress, and minimizes mistakes. You can track your income and expenses using Excel spreadsheets, accounting software such as QuickBooks Online, or by hiring a bookkeeper.


Whether you use paper receipts or electronic receipts after scanning them, independent contractors should review, organize, and backup their records regularly. You can have peace of mind throughout the year if you maintain an organized system for tracking your finances.

 

Tip #2: Make estimated tax payments


One of the challenges of being a freelancer is having to handle estimated tax payments. Self-employed people have to pay estimated taxes quarterly, since taxes aren't automatically deducted from their earnings.

Estimated taxes are calculated by estimating a freelancer's income, multiplying it by the federal and state tax rates, and splitting it into equal quarterly payments. Freelancers' estimated tax payments are calculated based on their projected income, minus any deductions or credits they may qualify for. Tax laws are complex, so freelancers often hire tax professionals to calculate their taxes accurately.


Failure to pay estimated taxes can result in a number of consequences. To start with, not paying your estimated taxes can lead to big penalties and interest charges. You'll avoid underpayment penalties by paying estimated taxes come April 15th. If you don't pay estimated taxes, the IRS may take your money from your bank account, or in extreme cases, freeze your assets. Also, a huge tax bill can add stress and delay bills, employees, or force freelancers into debt.


The best way to avoid these penalties is to make quarterly estimated tax payments, keep track of your freelance income and expenses, and seek professional assistance when necessary.

 

Tip #3: Know which tax deductions you qualify for


There are a number of tax deductions that are available for freelancers that can significantly reduce the amount of their taxable income. As a freelancer, you may be able to claim the following tax deductions:

Home office deduction

If you are a freelancer, you can deduct expenses for your home office like rent, utilities, and internet. To be tax deductible, the area designated as your home office must be used exclusively and regularly for work. Try to choose a room that can be closed off with a door or partition. In light of previous tax court decisions, you can be assured that your business can claim the room as a deductible expense.

Equipment and supplies

Travel expenses

Professional development expenses

Health insurance premiums


Records and receipts should be kept for all business-related expenses that can be deducted from your taxes. For tax deductions to be substantiated, the IRS requires supporting documents. Documents such as receipts, invoices, bank and credit card statements, and other financial records can assist in verifying business expenses. The lack of documentation can result in the loss of valuable tax deductions due to inaccuracy or insufficient record keeping.


Keeping track of all business-related expenses, storing receipts and invoices in an orderly fashion, and reviewing them regularly can save you time and money during tax season. Nowadays, you can use software like QuickBooks Online to help you create, track, and file all this stuff quickly and easily.

 

Tip #4: Understand the tax forms you need to file


In order to fulfill your tax obligations as a freelancer, you'll have to file different forms. These are some of the most common tax forms freelancers need:

Form 1040

This is the main tax form for individuals. It's the form freelancers have to use to report their income for the year and claim any deductions, exemptions, or credits they qualify for.

Schedule C

Schedule SE

Form 8829

Form W-9



 

Tip #5: Seek professional help if needed


Tax professionals can be a big help to freelancers who find tax filing overwhelming, complicated, or time-consuming. Here are some benefits of hiring a tax pro:

Time-saving

Tax professionals can help freelancers save time by filing their taxes on time and accurately. It helps if tax professionals offer training and will create more efficient workflows related to things like bookkeeping and receipt management that you can use.

Expertise

Peace of mind


 

To sum it all up...


Freelancer taxes can be tricky, but with proper planning, organization, and professional help, it's doable. Hire qualified professionals and leverage available resources to maximize your deductions.

Proper tax management can really improve a freelancer's financial situation. Freelancers can manage their taxes effectively by keeping accurate records, making estimated tax payments, knowing what forms to file and what deductions they can claim and keeping receipts to prove it. Lastly, get professional tax help when you need it.



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