After you branched out and spread your wings to become a freelancer, you find that it can be freeing to leave the conventional workplace.
You have considerable time on your hands working from home; you set your schedule as you like, and no manager is staring at you like a hawk all day.
But even with this newfound freedom, you still belong to your community. And that means being liable for paying taxes!
Taxes are a necessary evil for freelancers. No one likes the process of paying taxes, but they are a fact of life.
The good news is that there are several ways to increase tax savings on your tax bill, and this article will discuss the most essential of them.
So read on to find out how you can save enough for tax season!
10 Financial Tips to Manage Your Taxes Better as a Freelancer
As a freelancer, you are considered an independent contractor. This means that you are not an employee of the company or organization you are working for.
You are responsible for paying your taxes and any other expenses related to your work, such as office supplies and equipment.
This can be a significant expense, so it is essential to keep track of all your expenses and save receipts.
Before starting this process, it’s best to consult a personal tax accountant to help you with tax preparation.
They can help you set up a system to ensure you are organized and on track. Plus, they would ensure you’re making the right decisions for saving money!
Now, without further ado, here are ten tips for maximizing your savings:
1. Understand Your Deductions
As a freelancer, you can take advantage of tax-deductible business expenses to reduce your taxes.
These are expenses that are necessary and directly related to your business, such as office rent, supplies, and equipment.
You can deduct a part of your internet and phone bill if you use them for business purposes.
Another way you can make deductions is through your rent or mortgage payment and your utilities.
You can also deduct a portion of these expenses if you use a dedicated space in your home for business purposes.
2. Keep Track of Your Expenses
Keeping track of everything your spend is a must.
You must have receipts or other documentation to prove that you incurred the expense to claim deductions.
You can do this by using a simple Excel spreadsheet or accounting software such as FreshBooks or Wave Accounting.
3. Set Aside Money for Taxes
Since you are responsible for paying your taxes, you must set aside money each month to ensure you have enough when tax time comes around.
One way to do this is to calculate what you will owe based on your expected income and then set that money aside in a separate account.
This way, you will not be tempted to spend it on other things.
You can set up automatic payments to automatically transfer the money from your checking account to your savings account each month.
This will help you always have enough to cover your tax bill.
4. Pay Estimated Taxes
If you expect to owe more than $500 in taxes for the year, you may need to pay estimated taxes.
Estimated taxes are paid quarterly and are based on your expected income for the year.
You can use the IRS Estimated Taxes Worksheet to help you calculate how much you will need to pay.
You can also have the money withdrawn directly from your checking account by setting up an automatic payment with the IRS.
5. File Your Taxes Early
The earlier you file taxes, the sooner you will get your refund (if you are owed one).
You can file taxes as soon as January if you have all the necessary documentation.
If you are expecting a refund, it is best to file as early as possible to get your money back sooner.
6. Use Tax Software
Many different tax software programs are available that can help you prepare and file your taxes.
Some of the most popular ones are TurboTax, H&R Block, and TaxAct.
These programs will help you maximize your deductions and get the best tax refund possible.
7. Register as an LLC
If you are a freelancer, you may consider registering your business as an LLC.
This will allow you to take advantage of some tax benefits, such as the ability to deduct business expenses.
An LLC will also give you some personal liability protection if your business is sued.
You can register your business as an LLC online or through your state’s Secretary of State office.
8. Set Your Tax Payments in a High-interest Savings Account
If you have a high-interest savings account, you can set your tax payments in there and let the money grow.
It’s a great way to earn extra money on your tax payments.
Just make sure you have enough in the account to cover your taxes when they are due.
9. Get Proper Insurance Coverage
As a freelancer, you need to ensure you have the proper insurance coverage.
Your coverage includes health insurance, disability insurance, and liability insurance.
Without proper insurance, you could be facing a large financial burden if you get sick or injured.
The type of work you do also makes a difference.
For example, if you’re a consultant, you’ll need different insurance than if you’re a freelance writer, which is called professional liability insurance.
You can ask for quotes from different insurance companies to find the best rates.
You need to consult an attorney or accountant to ensure you are getting the right type and amount of coverage.
Remember to shop around and compare rates to get the best coverage possible.
10. Consider Your Retirement Savings
Don’t forget about retirement savings!
You can contribute up to $18,000 per year as a self-employed individual to a 401(k) or other retirement savings account.
This can help you reduce your taxes now and have a nest egg for later.
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Start Managing Your Taxes and Save More Money!
As a freelancer, taxes can be a significant expense.
But there are many ways to reduce your tax bill by taking advantage of deductions and setting money aside each month.
You can save money on your taxes and keep more of your hard-earned cash by following these tax savings tips.
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