When you are a freelancer, filing taxes is a tricky business, because the amount that you need to pay is not automatically deducted from the income gained, like when you have a salaried job. To avoid having unwanted surprises and problems with the IRS, when dealing with independent contractor taxes you need to have a full understanding of what you are due. To get to experience the full liberties of self-employment you need to plan and organize your finances carefully and here are some ways that you can do it more easily.
Find the Right Tools
When embarking on a freelance business path the first thing you should do is calculate how much you will need to pay and how much you will be able to save. Find a self employment tax estimator online which will help you with doing just that. Firstly, you need to estimate how much you will earn until the end of the year. Also, it is recommended to install some business organizer apps which will help you keep track of your finances and remind you when to fulfill your tax obligations. As a freelancer, you will have to pay them more than once a year, mainly your quarterly taxes, so it would be extremely handy to be able to have an insight into all of your business finances in one place.
Stay Informed about Possible Tax Deductions
It all may seem very complicated and costly and you might wonder if there are any financial reliefs that you could undertake. Well, the fact is, there are. Depending on the business structure you take on, you can apply for different types of tax deductions. They are the expenses that get deducted from your gross income, which lowers your taxes. It reduces your taxable income and by that, your bill gets lowered. The rules and regulations for them are different in every state so you should take it into consideration when calculating how much you owe. As a freelancer, your taxes will cover social security and medicare, and your deductions should be tied to necessities for your business activity.
Keep Your Business and Private Accounts Separated
It is important to have a business checking account so that you don’t get accused of owing a business tax debt. Use it only for business purposes and don’t make any private withdrawals or charges on it. This is not a necessity, but it is highly recommended to avoid confusion and problems. If you have a separate business account and you encounter any issue with the tax office, it will make it easier to prove to them that there aren’t any irregularities and that everything is well organized. Your legal business obligations won’t mix with your private ones and you will have a clearer picture of how your business is doing financially. This is one more field in life where you shouldn’t mix business with private life, even if you are your own employee.
Never Wait to Pay
Never wait for tomorrow to do something that could be done today. There are fixed due dates for paying quarterly taxes and you should keep up to date with them because otherwise you could be facing lawsuits and going into debt, which could only complicate your situation unnecessarily. If you have some leftover debt, prioritize paying it off over any other investment. If you miscalculate your payments or avoid paying them, at the end of the year you will be penalized by the IRS. Like previously said, there are apps that could help you with reminders and organization of your budget, so it would be wise to look them up. Sometimes it is easy to get wrapped up in other things and forget, but in this case, it should be avoided at any cost.
Plan Your Budget Before the Beginning of the Month
Take at least a few days or even a week before the end of the month to overview your financial dealings and plan for the one ahead. It is recommended to do the same with your yearly payments too. Try estimating potential expenses, like business trips or rent, and set a realistic budget. Always take into consideration unpredictable expenses, and leave out some extra money to pay them off. As mentioned in the last paragraph, you should be on top of things in time, so that you eliminate chances of being late or miscalculated the amount you are obligated to pay.
Organize and Keep All Your Bills and Receipts
This is one of the reasons it would come in handy to keep your bank accounts separate. You won’t be encountered with a situation where your water and electricity bills get mixed up with your business receipts. Never throw away or lose your bills or receipts and keep them well organized. It would help you greatly when dealing with the tax office. Besides that, it would make it easier for you to estimate your expenses for the time ahead. If you find it complicated and chaotic to keep boxes and boxes full of paper receipts, take into consideration digitizing all of it and keeping it in separate monthly folders. That way, everything will be cataloged and easily accessible. In that way, you will lessen the chances of mistakes and financial issues.
Have Everything Digitized
We have talked about digitizing bills and receipts, but that is not all that should be kept in the digital world. Besides good organization, it would also bring you better accuracy. Keeping all the metadata of your business in one place would help you estimate your success or the validity of your investments. Every human makes mistakes, but machines are less prone to them. Calculate your taxes and income on your computer instead of doing it by hand. Even though it is possible, it is harder to lose all that information if you have it in digital form on your computer.
This may all seem complicated and tiring to you, but in reality, it is the most important part of maintaining legal business dealings. There are a lot of freelancers who avoid paying their taxes, but the fact is that it will cause more harm in the long run than simply paying what you are due in time. Being organized and informed about everything is sure to lessen the additional stress of estimating your financial obligations.
