For a freelancer, the only thing more anxiety provoking than not having enough work or income streams, is tax season. Whether you keep all your receipts in an orderly fashion, or perhaps you simply stuff them in a paper shopping bag, one thing is for certain: come tax time, you’re going to attempt to capitalize on all the deductions you can. But it’s possible that not all of your eligible deductions will accounted for when it comes time to hand your tax documents over to your accountant.
Says the pros at MY CPA Coach, as a freelance business owner, the simplest way to reduce your tax burden is via small business deductions. However, an estimated 90 percent of business owners end up overpaying their taxes since they fail to write-off numerous expenses they already paid for. This happens because freelancers, along with their accountants, aren’t fully aware of the many tax deductions available today.
With that in mind, what are some of the most common mistakes freelancers make during tax season? According to a recent report by BNN, the rise of the U.S. gig economy in recent years means independence for millions of participating freelancers. That’s a good thing. But the less than good thing is the confusing and complex tax issues that arise every year.
For freelancers the extra burden of making estimated quarterly tax payments, keeping a detailed track of profits and expenses, and even planning for retirement is entirely up to you. Just one single mistake on your tax form can result in a costly mistake.
That said, here are some of the most common mistakes freelancers make during tax season.
Paying Your Estimated Quarterly Taxes
Unlike those persons who are traditionally employed, freelancers, such as freelancer writers, are required by law to pay estimated taxes every quarter if their accountants tell them they can expect to owe more than $1,000 for the fiscal year.
Unfortunately, many freelancers who aren’t used to this system fail to pay the quarterly tax, either because they don’t have the cash on hand, or they’ve forgotten about it. This mistake can result in a hefty bill at the end of the year.
The solution is to set aside a portion of your accounts receivable to use as estimated quarterly tax payments. Also, you can take advantage of accounting software to assist you with managing and calculating the payments. By doing this, you can make certain you never miss a payment again.
Keep in mind that if you end up overpaying your quarterly payments, you will be due a refund at the end of the year.
Dealing With Mixed Finances
Another common mistake freelancers make is mixing personal finances with their business finances. When these separate entities collide, tracking your business deductible expenses can be a challenging task to say the least. Mixing the personal with the business can even raise a red flag at the IRS who might feel an audit is required.
To properly avoid mixing your finances, all you need to do is open a bank account that’s exclusively used for business transactions. This is said to streamline the tracking of your income and expenses and make your tax season much less worrisome.
Lacking a Proper Concept of Business Expenses
Says BNN, lots of freelancers are simply unaware of the tax savings that can be deducted from your business expenses. Whether it’s a gas mileage deduction, a home office deduction, a business equipment deduction, an entertainment deduction, many opportunities exist to reduce your taxable income.
However, you can’t take full advantage of these deductions if you don’t know how to recognize them or they are not tracked correctly. But by understanding what expenses are eligible and by keeping meticulous records (and keeping receipts) of your expenditures, freelancers are able to maximize deductions and lower their overall tax bill by a significant amount.
One important rule of thumb: keep all your receipts. From toilet paper to airline flights, you never know what can be legitimately deducted until you speak with your accountant. Just make sure you have the proper receipt to back up a deduction in case the IRS comes knocking at your door.
Failing to Save for Retirement
Saving for retirement is yet another place where freelancers can make costly mistakes. Since freelancers do not have access to employee-sponsored retirement plans, they fail to save for their golden years. In fact, artistic freelancers such as writers, photographers, and painters might assume they will never retire, so why worry bother with putting money away for old age?
Never assume you won’t retire. Illness or simply a lack of enthusiasm for the job can creep in when you least expect it. Building a generous retirement savings will end up coming in handy. Options like a simplified Employee Pension (SEP) IRA or a Solo 401(k) can be had by all types of freelancers. By contributing to these plans either monthly or quarterly, you will be securing your future whether you plan on retiring or not.
