Tax season is rapidly approaching, so it’s a good idea to reflect on your current financial situation. Many people who now work from home have left their traditional job in favor of more flexible freelancing work. However, for those who are new to freelancing, taxes can seem threatening and impossible to understand.

Everyone has to pay taxes, even if they are self-employed, but that doesn’t mean it has to be harder than with traditional employment.

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By educating yourself about taxes, you can enjoy the flexibility and freedom of working wherever you want while deducting work-related expenses from your tax bill. This article will focus on what you, as a freelancer, need to know about taxes and how to keep more money in your pocket when it’s time to fill out the tax declaration.

1. Calculate Deductible Business Expenses

Earning money as a freelancer is one thing, but freelancers also have to contend with their business expenses. In a traditional work environment, your company will cover the costs of an office and the supplies necessary to perform work. As a freelancer, you’ll be spending your own money to make sure you’re able to accomplish your work.

Deducting certain expenses from your taxable income is the first tip for getting more money back on your taxes. Essentially, you need to monitor the costs required for your job and then document them.

For example, big purchases for your office like a printer, computer, or even a new desk can all be considered part of your business expenses. Keep track of smaller purchases such as pens, paper, and even sticky notes because these small payments add up over time. Consider investing in software to help generate reports to monitor your expenses.

Expenses don’t have to be physical supplies either; they can include advertising, software, and even insurance. Anything you use for work, even if it’s personal, can be included in your business expenses to reduce your tax liability.

Vehicles are often one of the largest expenses, but they can also be deducted. Include how much you spend on gas and your travel time to work. 

These are just a sample of some of the costs you can incorporate into your business expenses. Learning more about small business finance can help you understand how your business expenses work. Later, we’ll look more at why keeping track of what you spend is so important.

2. Claim Home Office Tax Deductions

Besides avoiding the morning and evening commute, freelancers that work from home often get to hang out with their favorite furry friend all day. Freelancers that use their spare bedroom, garage, or basement to work are all still eligible for home office tax deductions.

To maximize how much you get back on taxes, leverage the home office tax deductions to get more money back on your return. According to the Internal Revenue Service (IRS), your home must be the principal place for your business. Whatever area of your home you use must be specifically used for your business regularly.

Remember, you can choose any part of your home for the home office tax deductions subject to the IRS’ terms. This deduction is a great way to cut down on your taxes. Later, we’ll take a brief look at some other possible deductions you can consider.

3. Organize Your Business’ Paperwork

When you run your own company, staying organized is essential to growing your business. You can use different software to help manage your paperwork and keep you on track. Staying organized is also a great way to get more money back on your taxes. It includes tax forms, invoices, and anything else you might use for your business.

Some of the most important forms are the tax forms you can acquire from the IRS. The 1099-MISC is used to collect annual income, and the 1040-ES is used for calculating estimated taxes to pay each quarter of the year. These forms are important to understand, so you can find out how much to pay and what steps to take to get a bigger tax return.

– Keep Organized Records

Staying organized is paramount to your success as a freelancer, but recordkeeping is not only good for maximizing your tax return. It can also help you avoid legal trouble later on. I’ve made a special section on record organization to underline the importance of keeping your paperwork in order as a freelancer.

First, tracking office supplies, vehicle expenses, and other business-related payments will prepare you for calculating your deductibles. Without keeping diligent records, it’ll be difficult to calculate what these are.

Secondly, and possibly most significantly, keeping in-depth records will protect you if you are audited. Nobody wants to be audited by the IRS, but keeping records of your expenses that you claim for the deduction can help ease this process. Audited taxpayers have to prove that the deductions they claim are legitimate, or they may face additional tax payments and could have a lien placed on their assets.

Avoid these pitfalls by keeping both physical and digital records of your business. Store them in a safe and secure place and make sure that they are readily available both for yourself and in case you need them for the IRS.

4. Get Educated on How Freelancers and Self-Employed People Are Taxed

As a freelancer, you’ll be taxed differently than regular employees. To maximize your tax return, you need to educate yourself on how taxes for the self-employed work. Freelancers are taxed on their net income.

This means that the money you earn as a freelancer is taxed after your business expenses are deducted from your total business revenues. Additionally, self-employed people are taxed twice: once as income tax and second as self-employment tax.

Finally, your taxes will not be deducted from your pay, unlike at a traditional job. The best way to avoid a huge tax bill at the end of the year is to make your tax payments regularly throughout the year by using estimated taxes.

– Understand Your Deductions

Because deductions play a huge role in how taxes are calculated for the self-employed, you should make sure you are well-educated on how deductions work too. I mentioned business expense deductions throughout this article, but these can be further subcategorized. Frequent and most relevant tax deductions are:

• Healthcare expenses
• Equipment purchases
• Business assets
• Depreciation (section 179)
• Home office expenses
• Travel
• Business supplies

Understanding each of these distinct deduction areas and what qualifies is important for making the best tax decisions for your business.

5. Have the Right Insurance

It’s important to be properly insured, whether that means buying life insurance to protect your income or picking the right insurance to cover business-related activities. Working as a freelancer will mean selecting insurance that you might not have if you worked a regular job.

For example, commercial auto insurance may be necessary to protect you against damage or liabilities to your vehicles if you use them for work. Consider purchasing property insurance to protect your home office.

General liability insurance is also important to take into consideration. It will protect you if someone tries to sue you and cover legal fees and court expenses. Insurance can be deducted as a business expense, so you can get coverage and also save money on your taxes.

In any case, pick the right insurance and speak with a licensed agent to help you. Not every kind of insurance is right for every freelancer, so be sure that you and your insurance are the right fit.

6. Talk to An Accountant

Many people have moved away from traditional jobs and become freelancers in the past few years. Experts and more experienced people in this field can help you avoid making mistakes and save tons of money on your taxes. A certified public accountant (CPA) is one of the key people to keep in your network as a freelancer.

Although an accountant will increase your expenses, ultimately, it will save you money. Additionally, accountants can help you locate benefits and discover other deductions and ways to save money that you might not be able to find on your own.

Finally, an accountant can also help you with other business-related issues, such as managing your income and expenses. Besides saving you money on taxes, an accountant is an essential person to have in your team.

Make the Most as a Freelancer and Minimize Your Taxes

Getting money back on your taxes is important as a freelancer. By taking the measures we’ve discussed here seriously throughout the year, you can be sure to reduce the amount of money you have to pay on your taxes. Keep track of your expenses and your records, both to help get a bigger deduction and avoid problems if you get audited. 

Keep yourself educated by understanding the differences in how you’re taxed as a self-employed individual. Also, make sure you understand your deductions. Finally, find the right professionals to help you. Insurance agents and accountants can help you save even more money when the tax season arrives.

Taxes are inevitable, but by following these steps, you’ll be able to succeed as a freelancer and keep your taxes paid.

Author’s Bio: Lee Li is a project manager and B2B copywriter with a decade of experience in the Chinese fintech startup space as a PM for TaoBao, MeitTuan, and DouYin (now TikTok).

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