Although nobody wants to deal with taxes, not doing them can cause serious problems. The IRS is granted broad authority to recover any owed taxes. The IRS can file a tax lien or a tax levy, for example, to legally claim your property and satisfy a tax debt. Or, the IRS can garnish your wages. It’s in your best interest to avoid any of those kinds of situations by staying on top of your taxes.
If you’re a freelancer, taxes can be overwhelming because in most cases, you’ll owe more taxes than the average citizen. This is because you don’t have an employer paying for certain taxes on your behalf throughout the year. Instead, you’re paying the full burden of all those taxes yourself. So, what’s a freelancer to do? Well, we’ve compiled some handy tips to help you make the most of tax season.
1. Understand what expenses are deductible.
When you’re running your own freelance business, it’s critical that you understand what business expenses are tax-deductible and what are not. Reducing your tax liability is always the goal when it comes to your taxes, but you can’t just make up deductions (that’s tax fraud).
So, you should track the expenses that can be deducted like advertising, gas and miles, travel expenses, office supplies, computers, software, or insurance. Even if something is partly for business and partly a personal expense, you can still divide it and deduct the business portion from your taxes.
It might be a good idea to go as far as getting a business credit card, so you can more formally separate your company spending from your personal spending. Plus, you’ll get the opportunity to rack up rewards for things you’re buying anyway.
2. Take advantage of the home office deduction
If you have a space that’s dedicated solely to working, you can probably qualify for the home office deduction. There are a few conditions you’ll have to meet in order to get it but it’s a worthwhile one to look into because it can reduce your taxable income by quite a bit.
3. Use a professional to help.
If you’re in over your head with taxes, it might make the most sense to rely on a professional to help you learn more. Professionals also have access to different tools like CPA project management software and have much more thorough comprehension about subtle parts of the tax code.
4. Save your receipts.
While a shoebox full of random receipts is pretty much everyone’s worst nightmare, it’s critical to have records of all of your expenses in case you get audited. Try to keep all receipts, invoices, bills, and any other business-critical documents filed away and organized. Hold onto those records for at least seven years before you toss them.
5. Make sure you have the right kind of insurance.
The right insurance can help protect you against certain kinds of losses but it’s critical that you choose the right kind. For example, if you pick up a property insurance policy, it pays to repair or replace property like computers or inventory. General liability insurance pays for court costs, damages, etc. if your business loses a lawsuit. And, if you drive for work, it’s a good idea to apply for commercial auto insurance.
6. Be organized
To maximize your tax return, make sure that you track your businesses expenses and keep good records. There are plenty of apps and tools available that can automate much of the process for you. So, there’s no excuse!
Conclusion: Prepare for taxes one step at a time
When the tax deadline is looming, it can create a stressful situation for you. Luckily, there are plenty of ways you can prepare. Owning your own freelance business is hard enough without the stress of taxes on top of that.
To get ready for the upcoming tax season, make sure that you understand what expenses you should be tracking and keep a separation between your personal and business spending. Stay organized throughout the year and file away important receipts. And finally, if you can, consult a tax professional who can help ensure that you don’t miss any of the tax deductions that you deserve.