As a freelancer or gig worker, taxes can seem complicated. You don’t have an employer withholding taxes for you and you likely have expenses you can deduct. While daunting, a little preparation and knowledge of deductions can save you money and headaches come tax time.
In this blog post, we will share 20 tips to make tax filing easier as a freelancer or gig worker.
20 Tax Tips for Freelancers and Gig Workers
- Track Your Income
The most basic thing you need to do is track all your income from your freelance work or side gigs. Note who paid you, how much, and when. You’ll need this documentation when you file taxes. Use accounting software or spreadsheets to keep detailed records.
- Estimate Quarterly Taxes
As a freelancer, you typically pay quarterly estimated taxes on your earnings instead of having taxes withheld from a paycheck. Calculate these payments correctly to avoid penalties. The IRS requires you to pay at least 90% of what you’ll owe for the year.
- Expense Deductions
One major tax advantage for freelancers is abundant deductions for business expenses. Track every business-related expense, however minor. Things like equipment, internet service, software, mileage, travel, marketing, and office supplies are potentially deductible.
- Home Office Deduction
If you work from home, take advantage of the home office deduction by designating and using part of your home regularly and exclusively for work. Then you can deduct a percentage of rent, utilities, insurance, repairs and other household expenses.
- Health Insurance Deduction
Don’t forget you can deduct 100% of health insurance premiums if you are self-employed. This adjustment helps offset the additional Medicare and Social Security taxes you pay.
- Retirement Savings Options
Open and contribute to retirement accounts designed for self-employed individuals. Good options are an Individual 401(k), SEP-IRA, or SIMPLE IRA. Then you get tax deductions now and tax-deferred growth on investments.
- Business Entity Structure
Consider forming a business entity like an LLC which provides liability protection. The business structure also affects your taxes. Talk to an accountant about tax implications when deciding on an entity.
- Drive Safely
Car expenses are deductible when driving for business. But don’t risk accidents from distracted driving that could wipe out those savings with harm, medical bills, repairs, and insurance rate hikes.
- Capitalize on Lesser-Known Deductions
In addition to more common deductions, take advantage of everything available to freelancers. Some examples are self-employment tax, continuing education, magazines/books, organizing fees, equipment rentals, legal/professional services fees, and startup costs.
- Separate Personal and Business Finances
Avoid trouble come tax time by keeping business and personal finances completely separate. Never mix funds or pay personal expenses from business accounts. Open a separate business banking account and credit card.
- Record Keeping Apps
Organize receipts and track tax deductions seamlessly with apps like Evernote, Shoeboxed, Expensify, QuickBooks Self-Employed, and Hurdlr. Then you’ll have details on-hand when filing taxes.
- Estimate and Pay Quarterly Taxes
Paying quarterly helps avoid getting hit with a giant tax bill each April. Plus, it helps mitigate chances of penalties for underpayment. Calculate your liability and divide by four to determine quarterly payment amounts.
- Prepare for Audits
While the chances of audit are small, be ready just in case by keeping meticulous records. Hold onto receipts, bank statements, and other documents that clearly show income and qualify deductions for at least 3 years.
- Incorporate
Forming an S corporation or LLC can provide significant tax savings as a freelancer. Discuss your situation with a tax professional to see if it makes sense for you. Often there are tax advantages from legally separating your business finances from personal.
- Track Miles
If you drive for business consistently document odometer readings and trip purpose. The IRS lets you deduct miles driven for business at a standard rate which can result in substantial write-offs for local transportation and travel.
- Max Out Retirement Contributions
Reduce your taxable income today with allowable contributions to retirement plans for the self-employed. Maximize how much you put in up to legal limits. Just be careful not overcommit based on unstable contractor income streams.
- Claim the Home Office Deduction
Take advantage of tax deductions for using your home as a primary place of business. You can deduct part of rent/mortgage, utilities, insurance, repairs, depreciation and more. Calculate the percentage of home exclusively used for business activities.
- Insure Yourself
Don’t be caught uninsured if something happens on the job. Independent contractors usually don’t get worker’s compensation. Consider getting disability, liability, and errors & omissions coverage for protection.
- Learn the Rules
Educate yourself on tax law for freelancers and independent contractors so you don’t miss key deductions or get penalized for mistakes. Read IRS publications, follow experts, and work closely with an accountant experienced in self-employed taxes.
- Do Your Own Taxes Using Software
Don’t pay more getting your taxes done than necessary. With good records, reporting self-employment income and deductions is manageable using reputable tax prep software. Programs like TurboTax make the process smooth and affordable.
Conclusion
Taxes get complicated quickly for independent contractors and gig economy workers. Avoid hassles by staying organized, mindful of deductions, making quarterly estimated payments, and seeking expert guidance when needed. Following these tips will help you maximize write-offs so you get to keep more of the income earned from your business endeavors.
