If you’re a freelancer you're your own CFO, so knowing about taxes (and tax missteps) is an important part of the job. Here are four common mistakes that freelancers need to stop doing.
1-Not having an accounting system
Making a lot of money as a freelancer can also increase your tax liability. If you don't have a good system in place to track all of your income and expenses, you could end up paying more (or less) taxes than you're supposed to.
The good news is that there are many accounting software options out there to help you organize your books.
1. Not paying self-employment tax
Self-employment tax covers two main taxes: Social Security and Medicare. As an employee of a company, your employer would cover part of this tax. However, since you are your own employer, you have to pay the whole tax yourself.
It's very important to pay self-employment taxes on your freelance income. If your client issues you a 1099 form, it's transmitted to the IRS, who takes notice of this income and can demand you to make an accounting for that money.
3. Mixing expenses
Freelancers, often, allow their business expenses and income to get mixed with their personal finances. Separating expenses from the start makes filing your tax return so much easier. Business credit cards, for example, should never be used to pay for personal expenses or vice versa. If you feel all this is out of your league, a small business CPA can help you deal with these issues.
4. Neglecting retirement and health care
Saving for retirement is not only critical for your golden years but can also help you save on taxes. When you put money away for retirement, it reduces the amount of your income tax withholding. There are different options to save for retirement. Some smart options include: Individual 401(k), SEP IRA and ROTH IRA retirement accounts.
Regarding health care, as a small-business owner, there are tax benefits when you pay insurance premiums for yourself and your family members. Reporting these premiums on your taxes can reduce your adjusted gross income (AGI) which can make you eligible for certain tax breaks.
Avoiding these mistakes can help you keep out of trouble but can also make you eligible for tax breaks or help you save on taxes. If all this is too complicated for you, asking for professional counseling may be an expense you don’t feel like having, but it can pay off in the long run.