5 Mistakes Freelancers Make On Their Taxes
As a freelancer, you’re going to experience more issues when doing your taxes than most. With income coming from several different revenue streams, and often different countries, it’s so easy to make mistakes. Here are the most common freelancer tax mistakes, and how you can avoid them.
1. Not Tracking Your Finances
Even if you’re just starting out as a freelancer, you need to be able to track your income and expenses. If you can’t account for all these incomings and outgoings, then you’re going to lose out on deductions. That’s why you need to have a good accounting system in place.
Luckily, there are plenty of options out there for you if you’re not sure where to start. For example, you can use software like QuickBooks or Xero to help you automatically keep track of the money that goes in and out of your business. That way, you know everything when it comes to filing your taxes.
2. Not Paying Self Employment Tax
As you’re self employed, you’re responsible for paying any taxes on your income. ‘When a client pays you, they won’t be paying tax on that money’ says Ariana Saunders, a tax blogger at Lia Help and State Of Writing. ‘Because of this, you need to ensure you’re paying tax on it when you file.’
Self employment tax covers Social Security and Medicare, which is what would be paid by an employer if you were working for someone else. As you’re self employed, you need to handle this yourself. Remember that you can deduct a portion of these tax payments from your gross income, which does reduce how much you owe overall.
3. Mixing Business And Personal Accounts
As someone who’s self employed, it’s so easy to allow your business and personal accounts to mix together. For example, perhaps you’ve used your business credit card to buy groceries a few times. It seems harmless in the moment, but it can become a real headache later down the line.
It makes bookkeeping a lot harder for you, as you then need to separate what were business expenses, and what were personal ones. It’s much better to separate out all those payments at the start, and never let them intermingle. If you do that, filing your taxes becomes a lot easier.
4. Not Making Health Care Contributions
This is something you may not have thought of, but as a self employed person, you can get tax benefits for making health care contributions on your taxes. This is an often overlooked freelancer tax mistake. Paying health insurance premiums for yourself and your family members actually makes you eligible for tax deductions, allowing you to reduce your adjusted gross income (AGI). When you do that, you get certain tax breaks that you may not be eligible for otherwise.
Health care payments can include medical, dental, and in some cases, long term health insurance. Remember that as of the Tax Cuts and Jobs Acts of 2017, you may need to itemize deductions in order to get this benefit.
5. Not Saving For Retirement
As you’re a freelancer, it’s so easy to neglect savings, especially for retirement. ‘Making sure you’re saving not only sets you up for the future, but can also benefit you on your taxes’ says journalist Jordan Ashton, from Boom Essays and Essayroo. ‘It’s so important to ensure that you’re saving some amount of your income.’
When you start saving for retirement, you’ll actually reduce the amount of your income tax withholding. There are several ways you can do this, including:
- Individual or Solo 401(k): If you want higher contribution limits, this is for you. You can save with pretax dollars, while getting the tax deduction for employer contributions, as you are your employer.
- SEP IRA: You make tax deductible contributions and growth is tax deferred until withdrawal.
- ROTH IRA: You save after tax income that grows tax free forever.
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