Freelancing offers many benefits. In most cases, it allows you to be your own business, working when and how you want. Unfortunately, freelancing can also be problematic if you are not familiar with the different tax laws that self-employed individuals must follow. This guide will help you avoid a few common tax mistakes most freelancers make.
Not Reporting Income
If you freelance, you most likely will receive 1099s from one or more clients at the end of the year. These 1099s show how much income the clients paid you throughout the tax year. One common mistake many freelancers make is not reporting each 1099 they receive.
It is important to remember that if a 1099 is sent to you, it is also sent to the IRS, so they will receive a copy. Businesses must issue you a 1099 if you made $600 or more during the tax year. If you do not report the income on the specific 1099, the IRS will think you are misreporting your income, which could lead to severe tax penalties.
As a freelancer, you have the right to deduct business expenses. Unfortunately, many freelancers do not understand what constitutes an actual business expense.
Basically, a legitimate business expense is anything you purchased or used for the sole benefit of your business.
If you are a writer, for example, and used software or purchased a new computer during the year, you can deduct these as business expenses. If you operate your vehicle to travel to and from clients, you can write off different vehicle expenses as well. Also, using your home office solely for your business can be a deduction. Taking this home office deduction is only possible if the entire office space is used for your business needs.
To ensure your deductions are legitimate so you do not run into any issues after filing, be sure to save all receipts and records to prove your business expenses. Consider starting a file at the beginning of the year and saving each receipt as proof to make the filing process easier.
Not Saving Enough
Unless you will be taking a business loss as a freelancer, you will need to pay taxes on your income. There are many ways to pay your taxes as a freelancer. You can choose to pay multiple times throughout the year, like on a quarterly schedule. Or, you can wait and pay at the end of the year if you prefer.
Either way, you choose to pay, you need to make sure that you are saving enough money during the year to pay the right amount of taxes. Consider sitting down with an accountant or tax professional for tax preparation services so that they can determine the appropriate amount of taxes to pay based on your income.