The following post is a guest post.
Working as an online freelancer allows you to travel the world, make your own hours, and be your own boss.
While it can be a freeing experience most of the year, when it comes time to do your taxes, you might be feeling overwhelmed.
Figuring out how to keep track of your online income can be a challenge, especially if you have multiple income streams or clients. Similarly, if you work as an independent contractor for a variety gig jobs or micro task websites, you might have a slew of paperwork to deal with.
The deadline for filing taxes has recently been pushed back. If you don’t currently have a grasp on your freelancer income and tax requirements, it’s the perfect time to get your books in order.
If you want to make the most out of your tax refund and to simplify your freelance finances, the following tips are a great place to start.
1. Know Your Business Expenses
As a self-employed freelancer, you should be familiar with your regular business expenses.
But, if you are new to entrepreneurship, business expenses are the costs you incur during the operation of your company. These can include anything from the printer paper you purchased to the new video editing software you downloaded.
Since you have your own business, you can deduct certain expenses from your taxable income.
Your basic costs include things like:
- Office rent.
- Advertising expenses.
- Labor (includes hiring other freelancers).
- Legal fees.
- Office/business supplies.
You can even deduct car mileage! To be classified as claimable, the expenses must be considered ‘ordinary and necessary’ as per the Internal Revenue Service’s (IRS) guidelines.
If you frequently drive to meet clients, download an app like app like Hurdlr to track your mileage and business expenses is critical.
Using some sort of bookkeeping software to keep track of your invoices and income/expenses is also a great idea. Some popular bookkeeping options for freelancers include:
2. Claim Your Available Deductions
Before you start claiming deductions, it’s a good idea to spend some time researching which expenses you can claim on your return.
Claiming deductions on your tax return may sound more complicated than it actually is.
Once your research is done, to claim your business expenses as a deductible, you must complete and file a Schedule C form along with your tax return. This form itemizes your business expenses and calculates the income you have left after subtracting your deductions.
It’s a good idea to use as many deductions as you can on your return. Plus, you’d be surprised at the categories that can qualify.
For example, it’s possible to claim your home office as an expense as a work from home business owner or freelancer…not bad at all!
Deductions not only lower your possible taxes owed, but they could mean a larger tax refund is coming your way. With that money, you could reinvest in your business or add the money into your savings account.
3. Get Your Tax Refund Through Direct Deposit
Hopefully, after you have filed your tax return as a freelancer, you will receive a sizable refund.
To get your money even faster, you should consider having your refund directly deposited into your checking account.
Electing to have your refund sent straight to your account can speed up the process by weeks, instead of having to wait for a month to get a paper check in the mail.
If you plan on allocating your refund for personal use, you should also think about setting up a dedicated savings account to have it deposited into.
To ensure you don’t incur any minimum balance fees while waiting for your tax refund, use a no-fees savings account. Then, once you have your money, you can safely spend your refund without worrying about overdraft or service fees.
Getting a direct deposit is also more secure than waiting for a paper check to come through the mail. Even if you aren’t planning on traveling soon, a direct deposit can’t be lost at the post office or stolen from your mailbox.
4. Organize and Secure Your Documents
Tax season is the perfect time of year to get your documents in order.
Whether your work is entirely paperless or you prefer to have physical copies, organizing your records can help you run a successful business and save time when you go to file your taxes next year.
One major tax tip for freelancers is to actually organize their business documents in their version of an ‘office.’
I know it can be tempting to work from your kitchen table or sofa if you work online. Plus, if you’re a digital nomad, it can be hard to manage your finances while on the road.
Whatever the case, make sure your home base has some sort or organizational system in place that is dedicated to your finances.
Creating a home office space that is separate from your personal life is ideal. However, if you’re tight on space, invest in some simple filing cabinets or a system that lets you keep track of your financial documents.
With paperless records, you should be able to keep your documents on your primary computer, but it’s also important to backup files on an external hard drive or USB device.
Having backups can be extremely helpful in case of a major electronic failure or if you have equipment stolen. It would be best if you also kept a regular schedule for updating your backup copies.
Having secondary records won’t help much if they are outdated by several months. When not in use or once full, keep your backup drives in a safe place like a fire-proof safe or safety deposit box.
5. Categorize Your Expenses Throughout the Year
Just like organizing your documents, categorizing your expenses can save you a lot of time next tax season.
Throughout the year, you should be taking steps to keep your business expenses classified appropriately.
The simplest way to categorize your expenses is to use a business credit card for all of your work-related transactions.
Some credit card providers even offer instant categorizing as you charge expenses throughout the month — though you might want to take time to reconcile the transactions to make sure the categories are correct.
Then at the end of the year, you can use the provider’s online portal to view all of your yearly costs in one place. If possible, you can then download a spreadsheet of applicable charges to use for your tax return.
If you don’t have a specific business credit card, you can also use a budget to track expenses. A budget tracker might be a little more time consuming than a credit card since you will have to manually enter your expenses as you incur them, but it won’t require the use of an extra line of credit.
Nowadays, services like Quickbooks allow you to import your expenses from your bank account or credit card into their software.
This type of software can speed up your categorization process since you won’t have to enter each expense separately. It’s also easier than running a spreadsheet where you could create errors with typos or transposed entries.
Choose the Right Insurance As A Freelancer
If you don’t already have insurance for your business, you should set aside time to look for appropriate coverage.
Choosing the right insurance for your business is crucial since an employer doesn’t cover you. In case of any unforeseen circumstances, insurance will help protect you and your business.
Plus, if you are worried that insurance is too expensive, you should keep in mind that most forms of insurance are tax-deductible.
Certain types of insurance, such as property, health, general liability, and commercial auto can usually be deducted from your taxable income. Depending on your business and office location, you could qualify for all of these forms of insurance.
When researching which types of coverage are the right fit for your situation, you should use an online marketplace to find the best providers for you and your business.
Once you have health insurance, you could also qualify for a tax credit to help offset the cost of your premiums.
Of course, this is dependent on your income and financial situation. If you decide not to have health insurance, you will be required to pay a penalty, which is based on a percentage of your income.
To predict the total amount of your penalty, you can use an online calculator to see if it is financially beneficial to skip having health insurance.
Set Up a Health Savings Account (HSA)
Another awesome tax tip for freelancers is to put their tax refund to good use by setting up a HSA.
It might be tempting to take your tax return and to book a vacation or buy that new flat screen TV, but consider this alternative first!
Even with excellent insurance coverage, you could still run into some medical expenses. To help protect your personal savings, you should set up a health savings account (HSA).
These types of accounts also cover a wide range of expenses besides medical. For example, you could pay for qualified mental or dental expenses with your account.
HSAs are perfect for freelancers as you can deposit funds into them without paying taxes. A health savings account can also cut your tax bill if you are enrolled in a high-deductible health plan. I
f you end up contributing to your account with taxed earnings, you can even deduct your deposits from your gross income on your tax return. That means even more tax savings when it comes time to file your return.
Plan for Your Retirement
Being a freelancer might be the perfect career choice for you, but you most likely won’t want to work forever. Start planning for your future today and enroll in an appropriate retirement plan as soon as possible.
No matter what type of plan you invest in, it’s a good idea to get a head start on saving for your retirement.
There are several types of programs to choose from, but if you’re just starting out in your freelance career or have less than $6,000 to put away each year, you might want to use a traditional or Roth individual retirement arrangement (IRA).
This option is great for the self-employed because you can receive tax deductions on your contributions. You can also withdraw money from your account without paying any taxes.
If you are a business owner with no employees, a solo 401K might be the perfect retirement plan. This option is an excellent choice for people who want to contribute significant amounts of income to their retirement.
Since you are considered an employee, you can pay a percentage of your income into the 401K. Then as the employer, you can also match that amount to a certain percentage.
If you are getting a late start on planning for your future, this will help you get a good amount of money set aside for your retirement.
On the other hand, if you do have a few employees, you might have to use a SEP IRA. Like the solo 401K, you can contribute to your account as an employee and the employer.
However, you must provide the same percentage to all other employees. For example, if you match 10% of contributions for yourself as an employer, you must also match the 10% of contributions for your other employees.
A SEP IRA is also easier to maintain than a solo 401K since there is less administrative work involved.
The previously mentioned plans are only three of the possible options available for self-employed business owners. To find the best plan for your business situation, you should speak with a financial planner and decide on the right fit for your lifestyle.
Tax season as a business owner or online freelancer can be tough…especially if you have multiple clients, income streams, or businesses to manage.
However, if you make it a priority to prepare ahead of time, you can save yourself a lot of time, money, and stress. This is true for bloggers, freelancer writers, business owners, and gig workers alike.
To make the most of your tax refund, you should start planning for the future as soon as possible.
Whether you start an HSA or a retirement plan, you need to save and invest your money wisely. Your future self will thank you for the foresight.
Thanks for reading! Hopefully this list of freelancer tax tips helps you get your finances in order this year.
Tom is a 23 year old recent college graduate from Canada with a passion for side hustling, passive income, and marketing. This Online World is all about providing people with honest ways to make and save more money by using technology. To learn more about Tom, read his About Page!
If you’re interested in freelance writing services or want to partner with This Online World, please visit Tom Blake Digital to get in touch!