As a freelance worker, you enjoy numerous benefits that your salaried counterparts do not have access to. For example, you are your own boss, and you can easily set your own work hours, determine which clients you want to work with and obtain full compensation for your efforts. On the other hand, you must also manage your finances well. There may be challenges associated with accounts receivable being paid on time and keeping your expenses as low as possible. Perhaps one of the most significant challenges, however, relates to taxes. As a freelancer, your income taxes are not withheld, and this can create a significant a tax burden when you file your taxes. You can take a few steps to minimize your tax burden and to make it easier to pay your tax bill.
Maximize Tax Deductions
Self-employed workers are able to right off many of their business-related expenses as tax deductions. For example, your business office supplies, computers, phones and more may all be tax deductible. If you have a dedicated office space in your home, you may be able to deduct a portion of your mortgage interest or rent payment, utilities, repairs and maintenance on the home and more. In addition, if you use your vehicle for business-related purposes, you may be able to deduct travel expenses. You will need to carefully maintain excellent financial records to document your deductions, and you will need to retain these records in case you get audited. By taking these steps, you may be able to reduce your tax bill by a significant amount.
Estimate Your Taxes Early in the Year
Most freelance workers who maximize tax deductions will still owe money on a sizable tax bill each year. Unless you have a hefty savings account balance to draw the payment from, you will need to properly plan for the payment of this tax. As a first step, you can estimate your tax bill for the coming tax bill. This should ideally be done as early as possible in the tax season. It can be difficult to determine how much money you will earn through freelance work each year, so you may consider updating your tax bill projection each quarter. This will help to ensure that you are on track for meeting your tax payment goal.
Have a Tax Payment Strategy
After you have estimated how much money you will owe in income taxes on the next tax day, you need to start saving for the payment. The best way to do this is by saving a portion of your income each monthly. Simply estimate how many months remain until the taxes are due, and calculate a prorated amount to determine how much money you need to save each month. In some cases, a freelancer may be making this estimate very close to the tax due date, and it may be too late to save all of the money needed. You can consider setting up monthly payments with the IRS, but this can be a burden to your budget for the next few months or year. You can also consider borrowing the money. For example, you can get a title loan estimate to obtain equity from your car to pay the tax bill. If you borrow money, ensure that you have a repayment strategy for paying the loan balance in full.
Being your own boss as a freelance worker can be a dream come true, but it is not without its challenges. Follow these tips to overcome the tax challenges associated with being self-employed.