Freelancers might want to consider what they are going to do in terms of that filing, because come tax time in April, they may want to take certain deductions they are eligible for to reduce their burden so that they don’t have to write a big cheque at the end. If freelancers do a good job tracking their incomes and expenditures throughout the year, then they won’t have to be so worried about paying the tax man come filing season in April.

A freelancer’s challenge will be taking charge of tax filing and making quarterly estimated tax payments on her own, which will require proactive tax planning before penalties and interest charges end up eroding potentially large profits.

Keep Detailed Records

As tax-planning goes, it starts with keeping good records The freelancer is well compensated for keeping distinct and clearly labelled personal and business bank accounts and credit cards, separate from each other, and entering receipts and invoices into invoice tracking software to follow invoices sent and invoices received, payments made, and amounts paid. Not only does it keep bookkeeping simple, reducing errors. It helps freelancers identify deductions. Freelancers who keep track of detailed expenses are then able to adjust operational expenses based on finding inefficiencies. Failure to either remarket or track expenses often results in uneven tax liability, as well as failure to budget accordingly. It also means they are less able to keep spending aligned with business goals. Freelancers should make quarterly tax estimates (much like payroll that salaried employees receive from their employers). This, too, will help freelancers if they want to be sure they are not overpaying taxes or underpaying taxes at the end of the year. Sometimes calculating the correct quarterly amount can be difficult with fluctuating income. The IRSProb firm recommends talking to a trusted tax advisor who can assist with this calculation. With fast-changing tax laws and regulations, taxpayers may find it cumbersome to stay abreast of all the changes out there to keep your tax planning effective. There are many avenues to keep up with changes that affect taxpayers’ status: trusted mass media venues such as major newspapers, news reels, as well as with a tax advisor by attending relevant seminars or webinars to stay updated on changes relevant to your tax situation.

Separate Your Personal and Business Expenses

For example, freelancers can claim tax deductions that are normally available to regular employees (eg, home office). Learning this and following the appropriate steps can significantly reduce your overall tax liability. Keeping personal expenses separate from business expenses will also be important for tax planning purposes: maintaining separation might both simplify the bookkeeping and reduce your errors with recording expenses, and make it easier to track eligible deductions. You might find setting up separate business accounts and credit cards helpful for these purposes. You have to pay your own income taxes and self-employment tax (Social Security and Medicare) as a freelancer. I usually recommend saving 25-30 per cent of each payment you get during the year to cover those; it gives you a bit of a cushion should there be more you owe at year-end. Check out changes to the tax laws and other regulations; get a tax advisor and meet with him annually and/or go to seminars and webinars – all can help.

Make Estimated Tax Payments

Unlike regular employees who have taxes withheld from each paycheck, freelancers pay quarterly estimated taxes based on projected annual income. That’s hard for people who are new to variable income. Make sure you are getting your quarterly payment estimates right or you’ll get dinged. The unpredictability of self-employed income can make getting accurate estimates tricky, but the IRS allows for safe harbour rules that you should use if you don’t want to end up owing a big ‘ol penalty next tax time. Record your business expenses so you can make initial and following estimated tax payments correctly. Consider opening a second bank account for your freelance business, and use software to track invoices, receipts and payments throughout the year, reconciling your payments regularly. Save confirmation receipts from online payments, or plan ahead and use a credit card rather than electronic payment – with a bit of forethought and the help of an adviser, you can avoid having to scramble at tax time to make estimated estimated federal and state payments by the due dates.

Schedule a Meeting with a Tax Advisor

The core process of effective tax planning is evaluating three key factors – past filings, what’s currently happening and what the law requires, and what future goals clients have in relation to their money. Basically, that’s how you avoid the 40 per cent bite. It’s an ongoing process that helps clients get through the maize-like tax code and keep more of their money in their pockets. Since your personal income and your freelancing activities are intertwined, look for professional advisers with expertise not only in freelancer taxes, but also in small business taxes. A good adviser will help you untangle personal and business expenses, track revenue and expenses correctly, and take advantage of allowable deductions. IRSProb is like your own personal ranger guide in Big Bend National Park. They get where you are at, and can help take you from the white-knuckle bank-held rodeo to the leader of your own tax rodeo. Call us now to get started.