Freelancing can be an extremely lucrative way to supplement or even replace your regular income stream, but it’s crucial that you understand how freelance work taxes work so as to avoid an unexpected tax bill or penalty payments every spring.
Tax deduction strategies that help minimize how much money you owe at tax time are also wise choices for freelancers, so here are four strategies to get your freelance tax game on track:
1. Set Up a Separate Bank Account
Freelancing can be an exciting way to set your own schedule and be your own boss, but it’s crucial that you understand how taxes work when self-employed.
Due to the nature of freelance work, tax payments may need to be made quarterly instead of annually – so be sure to factor this into your financial planning so there are no surprises come tax season!
To maximize tax deductions and expenses, it’s advisable to open a separate business bank account. With Found, our all-in-one banking solution featuring business accounts, powerful invoicing tools and time-saving bookkeeping software you can start tracking income and expenses easily – give it a free try today!
2. Keep Good Records
As a freelancer, it’s your responsibility to track both income and expenses on a regular basis. Doing this allows you to prepare for tax season by declaring and claiming all potential deductions; additionally, well-organized receipts could save both time and money during an audit.
To file your taxes, a Schedule C tax form will enable you to report all freelance income earned throughout the year and any expenses related to business-related endeavors that you incurred as well as claims that can reduce taxable income–saving you hundreds (or even thousands!) along the way!
3. Deposit a Part of Every Payment
No matter whether you work as a freelancer full-time or just earn extra income on the side, it is essential that you set aside part of every payment to avoid an astronomical tax bill at tax time.
Freelancers should keep track of 1099 forms they receive from clients by Jan. 31 each year and any expenses related to business-related expenses, like mileage or vehicle depreciation that they can claim as expenses.
Freelancers must pay estimated taxes quarterly as their employers don’t withhold income taxes from their paychecks. Bonsai makes it simple and affordable for freelancers to estimate quarterly taxes, record deductions and file on time – give it a try now for free and see! Expenses and earnings can either be automatically imported from bank accounts or manually added manually if desired.
4. Keep Your Personal and Business Accounts Separate
Freelancers who fail to separate personal and business accounts often find themselves surprised when the amount of taxes owing comes due in April. To make tax time simpler, create an account specifically dedicated to freelance income and expenses as soon as possible and set it up as soon as possible so tax time becomes much simpler.
An independent account makes it much simpler and quicker to keep track of and prove your deductions in case of an audit, and is also easier when filing quarterly payments and reporting your income to the IRS.
Bonsai Tax is an all-in-one software solution for freelancers that will allow them to track all their tax deductions, file their returns on time and estimate quarterly taxes. Try our 14 day free trial now or download the best receipt-tracking app to further simplify things!
5. Pay Estimated Taxes
As an independent contractor or freelancer, the IRS mandates that you make quarterly estimated tax payments since there’s no income tax withholding like regular employees do from W2s.
Take care to set aside an appropriate amount each quarter and keep track of any deductions you claim, while meeting filing deadlines so you don’t get caught off-guard come tax season.
Hire a CPA or accountant that specializes in freelancer taxes to assist with finding the appropriate business structure, filing taxes more easily, finding tax deductible expenses and filing quarterly estimates – it can save a great deal of hassle in the long run!
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