Switching from a traditional full-time job to life as a freelancer is a big transition. An unpredictable income, a new workspace, and figuring out how to manage your own workload and business are all large and necessary adjustments. But, one piece of the puzzle people often neglect to think about before jumping headfirst into the freelance life? Taxes.
Admittedly, it’s definitely not something I gave much thought to before deciding to start my own freelance business. However, now that I’ve gotten used to the pain of paying taxes out of my own pocket, it’s an aspect I like to warn all prospective freelancers about.
Of course, everybody pays taxes (at least, they should). But, when you work a traditional full-time gig, all of that money is immediately taken out of your paycheck before it ever gets to you. It still hurts to see those dollars removed from your hard-earned check—but, it’s made a little less painful by the fact that the money was never truly yours to begin with. It never made it to your bank account.
When you’re a freelancer? You need to consciously stash away money every month so that you have the funds available to go in and cut a big, fat check every quarter. It’s a mental thing for me—writing that check is way more painful than simply having the money deducted from each paycheck.
Needless to say, if there’s any way for me to save on my taxes, I’m all for it. And, while I’d never recommend trying to cheat the system, there are a few tactics you can use to ensure you’re being as smart as you can when it comes to your finances and taxes.
1. Track All Related Expenses
What’s one of the greatest ways to keep your taxes to a minimum? Write-offs! As a freelancer and business owner, you can write-off a number of your expenses. These include (but certainly aren’t limited to) any professional subscriptions or membership fees, your office supplies, furniture and equipment, your business insurance, and really any other cost associated directly with your business.
You want to make the most of tracking your expenses. But, remember it’s important to always be honest. Everything you record should be a true, justifiable business-related expense. And, keep in mind that there might be certain rules you need to be aware of when it comes to claiming certain things (like a portion of your mortgage for your home office!). So, meet with a professional to get your questions answered. It’s better to be well-informed now.
2. Remember Your Mileage
Most people remember to keep track of their expenses—particularly the large ones. However, your business-related mileage is another write-off that can really help to save you some change come tax time.
You can write-off your mileage for activities directly related to your freelance business. That drive to a client meeting? That trip to the post office? Those miles to get to your computer repairman? They’re all necessary to keep your business running—so, track that mileage! It seems small (especially if most of your trips are short), but it can really make a big difference on your taxes.
3. Keep Accurate Records
By now, you realize the importance of tracking things like your income, expenses, and mileage. But, where should you keep all of that information so it’s safe and easy to reference come tax time?
You absolutely need to have a solid record keeping system in place for your freelance business. Whether you purchase an accounting software like QuickBooks, use an online platform like Wave, or even set up an Excel spreadsheet for you to utilize, ensure that you have a place where you can safely store all of this necessary information.
Receipts are another thing you need to have a handle on. You need to have a receipt of purchase for every single item you claim as a business expense. You can scan those and store them digitally. Or, you can keep it simple like me. I have a file folder with different pockets for each month. All of my receipts for that particular month get stored there. At the end of the year? I bundle those up into a different package and stick a year label on them.
You might think that accurate record keeping simply can’t be helpful in saving you money on taxes. But, it’s best to be prepared. If you end up getting audited? Being able to hand your tax accountant a bunch of organized documentation means they’ll have to spend less time on your case—meaning you won’t have to pay as much for their services.
4. Explore Investment Options
This year, I set up a traditional IRA in order to get a break on my taxes. Why? Well, quite simply, contributions to a traditional IRA are tax-deductible. By contributing close to the maximum amount (which is $5,500 if you’re younger, and $6,500 if you’re 50 and older), I was able to save big on my taxes. Yes, it meant moving some money around and having less liquid funds in my savings account. But, instead of cutting a check for a couple thousand dollars for my taxes, I was able to keep all of that money—and save it for retirement!
Saving for retirement is recommended for anyone. But, it can be especially smart for a freelancer searching for a bit of a tax break. There are tons of different options—like traditional and Roth IRAs, solo 401(k)s, and a Simplified Employee Pension (SEP-IRA). Talk to a professional to figure out which option is best for you and your wallet!
5. Enlist Professional Help
All of these tips should help you to save some cash and get more money back from the man. But, in the end, I always recommend sitting down with a well-vetted tax expert to talk everything over. They’ll likely be able to make recommendations for how you can move things around or save even more money. Plus, they truly help to take some of the pressure and anxiety out of tax time. Knowing you have a knowledgeable resource to fall back on provides some peace of mind.
Even the word “taxes” is enough to send a shiver down any freelancer’s spine. But, as long as you’re prepared and organized, the whole experience really doesn’t need to be anything too traumatizing. Keep these tips in mind and sit down with a professional, and you’re sure to get through it all pain-free (alright, at least somewhat pain-free).
