Freelancing is a rapidly growing industry. In fact, it is estimated that 40% of workers in the United States will be freelance or contingent workers by 2020. People love the flexibility that comes with freelance work. They get to pick and choose their projects, work from anywhere in the world, and avoid the limitations of a traditional office setting.
While freedom is paramount with most freelancers, there is no freedom from the tax man. As with any full-time corporate employee, freelancers are responsible for reporting their income and paying taxes. Here’s how aspiring freelancers can survive tax season.
Set Your Estimated Taxes Aside
The most important thing you can do as a freelancer is anticipate your income tax and set the money aside in advance. Every time you receive payment, calculate the estimated taxes based on your bracket and put that money in a savings account. Continue to do this as the year progresses.
When you are employed by a business as an employee, rather than a contractor, the company handles tax deductions for you. As a freelancer, you lack that luxury. Setting aside your tax money as you receive payment will take the burden off when your tax bill comes. You know that you will have that money readily available to pay. Hopefully, the savings account results in a little interest over the year, so you can treat yourself for a job well done after the bill is paid.
Track Your Expenses
Organization is paramount for freelancers and tends to be the area where they fall short. Creative minds are often disorganized and constantly on the move. It is important to take time each month to sit down and record your expenses, then file the backup to these claims. When you are completing your tax claim, you can use these expenses to offset your payment.
If you don’t have backup for your expenses, don’t claim them! In the event of an audit, this will be viewed as a false claim and can result in a huge tax penalty and pesky investigation into other areas of your business.
Know Your Deductions
You don’t have to be a tax expert to run a business, but you should have a basic knowledge of the process. Knowing your deductions is crucial, as these can reduce your tax bill by a substantial amount. It is also important to be up to date on changes to deduction availability and eligibility.
Taxes change from one year to the next, and things you have previously claimed may no longer be available. On the other hand, new deductions relevant to your business may be introduced. If in doubt, look at a year end filing guide or consult a professional accountant to ensure everything is in order.
Keep Your Information
As much as we’d all love to burn everything and roast marshmallows in the flames when tax season ends, doing so would be detrimental to your cause. After filing your taxes, you need to keep all paperwork pertaining to your report for seven years. This is why having an organized filing system is essential for freelancers.
The government reserves the right to come back and investigate previous claims, either randomly or based on suspicious information. Sometimes the items flagged as suspicious are legitimate, but it is still important to be able to prove it. For example, if your medical expenses are substantially higher than previous years and pass the threshold of what is considered to be acceptable, the government may wish to see proof. The expectations will be different depending on your country of residence.
When it comes to tax season, knowledge is power and organization is king. You need to anticipate challenges and prepare to correct them ahead of time. Doing so will help you be successful in the growing freelance economy.