Becoming a freelancer is exciting! Suddenly you are at home and able to work your own schedule. You and your partner have more freedom to do what you want, and you can still make a decent income. It’s the best of all worlds!
Before you start freelancing, though, you should know the top five things that could affect your bottom line. They all affect the largest liability you’ll face as a freelancer – your taxes.
Here are the top ways to minimize your tax liability and keep more of the hard-earned money you make freelancing.
1. You’ll pay both sides of the taxes.
When you work for someone else, they cover the Medicare and Social Security taxes. When you’re on your own – there’s no one to pay them but you. The self-employment tax is equal to 15.3%.
2. You may write off your home office.
If you use a part of your home exclusively for your business, you may write off the expenses on your taxes. Keep in mind, though, to write off your rent, mortgage, utilities, or even taxes for that portion of the home, it must be for exclusive use and not shared for other uses outside of business hours.
3. You may deduct mileage and meals.
If you can prove any mileage and meal expenses you deduct are strictly for business purposes, you may deduct them. They cannot be intermingled with personal uses, though. For example, if you and your partner go on vacation, but you spend two of those days in seminars, it doesn’t count as a business expense since the vacation was personal.
4. Keep your business and personal expenses separate.
Even if your freelancing business is small, keep a separate business account for your business expenses. It will make your life a ton easier at tax time. Without the separation, it’s hard to distinguish between the two and could even trigger an audit from the IRS if you aren’t careful.
5. Pay your taxes quarterly.
No one likes that big unpleasant tax bill on April 15th, especially freelancers. Since you’re responsible for your own taxes, it’s best to make estimated quarterly payments. This does two things:
- Lowers your total tax bill on April 15th as it’s hard to pay the entire bill upfront
- Eliminates the risk of paying a late payment penalty because you didn’t keep up with your quarterly payments
As a freelancer, you have a lot more tax worries than a person who works for an employer. It’s important to get the tax support you need from a professional. You’ll learn which deductions you can legally take, how and when you should pay and what forms you must file.
While taxes are a bit more complicated when you work for yourself, they aren’t impossible and the benefits of working for yourself are amazing. Take advantage of your ability to work from home or for yourself and get the tax support you need to make it worthwhile.