Tax Hacks For The Hustle

Freelancing offers unparalleled freedom and flexibility, allowing us to pursue our passions while maintaining control over our schedules. However, along with this autonomy comes the responsibility of managing our finances, including taxes- welp!. Tax season can be particularly daunting for freelancers, as we often have complex income streams and deductible expenses. To help you navigate this maze and ensure you're maximizing your deductions while staying compliant, here are some essential tips for freelancers when it comes to taxes.

A little disclaimer! We aren’t tax professionals, this is just what we have learnt along the way. Please consult a professional when doing your taxes.

Keep Meticulous Records:

One of the most crucial aspects of managing your taxes as a freelancer is maintaining thorough and accurate records of your income and expenses. This includes invoices, receipts, contracts, and any other relevant documents. Consider using accounting software or apps designed for freelancers to streamline this process and make it easier to track your finances throughout the year.

The two main areas you must be tracking and have organised receipts for are: 

• Your Income

Sounds silly to state the obvious. However, when you have multiple client projects happening throughout the year it gets easy to forget how much has gone into your account. You only receive 1099’s from clients who have an invoice of over $600 so any smaller projects must be self-reported. 

• Your Business Expenses 

Business expenses are a freelancer’s saving grace when it comes to tax. Throughout the year it can get really easy to lose track of what you have spent on your business. It’s crucial to keep track of your expenses so you can lower that hefty tax bill, we love using The Productivity Method’s digital planner to track our business expenses and keep receipts. Here are just a few things you can claim; advertisements, computer repairs, subscriptions, phone bill, rent, interest on business cards, travel costs and much more! 

Understand your Tax Obligations:

As freelancers, we are typically considered self-employed individuals, which means we are responsible for paying both income tax and self-employment tax (Social Security and Medicare taxes). Familiarize yourself with the tax laws in your country or region, including any specific deductions or credits available to self-employed individuals.

When you get to this stage you should have a complete record of everything you have earnt and spent which should make the process of filing a little less of a headache. Paying your taxes quarterly is important for reducing your tax bill. Use the form 1040-ES to file your estimated taxes. It’s a good idea to save a portion of your earnings each time you get paid to go towards your tax bill, we like to open a savings account so we aren’t left scrambling to find money to pay. A few good forms to have on hand: Form W-9, which a client may ask you to fill out when you take on a job, and Form 1099 if you receive payment for $600 or more from a client or customer, they should issue you a Form 1099-NEC (Nonemployee Compensation) to report the payment. For your annual income report, you will need Form 1040 to self-report exactly what you’re earning. 

Set Aside Money for Taxes:

Unlike traditional employees who have taxes withheld from their paychecks, freelancers are responsible for making estimated tax payments throughout the year. To avoid a large tax bill come April, it's essential to set aside a portion of your income for taxes regularly. Aim to save at least 25-30% of your earnings for taxes, though the exact percentage may vary based on your income level and tax bracket, setting aside money throughout the year can prevent you from scrambling when your bill arrives. 

Take Advantage of Deductions:

As a freelancer, you're entitled to deduct business-related expenses from your taxable income, reducing your overall tax liability. Common deductible expenses for freelancers include home office expenses, professional development courses, office supplies, equipment purchases, software subscriptions, travel expenses, health insurance premiums and more! Keep detailed records of these expenses to support your deductions in case of you get audited.

Maximize Retirement Contributions:

Freelancers don't have access to employer-sponsored retirement plans like 401(k)s, but that doesn't mean you should neglect saving for retirement. Consider opening a tax-advantaged retirement account such as a SEP-IRA, Solo 401(k), or SIMPLE IRA, which offer tax benefits and allow you to save for the future while reducing your taxable income. Contributing to these accounts not only helps secure your financial future but also provides immediate tax advantages.

Hire a Tax Professional:

While managing your taxes as a freelancer is certainly possible on your own, it can be complex and time-consuming. Consider hiring a qualified tax professional or accountant who specializes in working with freelancers and self-employed individuals. They can offer valuable advice, ensure you're taking advantage of all available deductions and credits, and help you navigate any tax-related issues or audits. If you’re on the lookout for an accountant, we suggest posting on our Jobs Board. We have a community of over 300K freelancers who are highly qualified in their fields. 

Stay Organized Year-Round:

Don't wait until tax season to start thinking about your taxes. Make tax planning and organization a year-round priority by staying on top of your finances, regularly updating your records, and keeping track of important deadlines. By staying organized throughout the year, you'll make the tax filing process much smoother and less stressful.

Taxes can be a complex and intimidating aspect of freelancing, but with the right knowledge and preparation, you can navigate them successfully while maximizing your deductions and minimizing your tax burden. By keeping meticulous records, understanding your tax obligations, setting aside money for taxes, taking advantage of deductions, maximizing retirement contributions, hiring a tax professional, and staying organized year-round, you can ensure that tax season is a manageable and even rewarding time for your freelance business. Good luck this tax season freelancers!