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. Plus, four ideas for you to start thriving as a freelancer.
4 MISTAKES YOU SHOULD AVOID AS A FREELANCER
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.
2. 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.
BONUS TRACK: 4 FREELANCE BUSINESS IDEAS
Those with imagination and an artistic eye can easily turn a flair for the creative into a thriving freelance career. Here are some ideas for creative freelancing careers that you can start with a relatively small initial investment.
Freelance photography is a difficult sphere to enter because many people don’t think they need to pay for something that could be free.
This is why you need to find a niche where you can reach high-quality photography clients. The more specific your work is, the less competition you’ll find. This is a way of becoming famous for what you do and being able to generate an important income.
To make some extra money on the side, you can also sell stock photography to sites like Shutterstock and iStock; the commission you’ll receive on each image isn’t much but if you sell enough photographs, it can make a difference.
2. App Development
If you have an idea for an app and have already tested with friends and family that it could be popular, you can put your coding skills to work, and create it. You can develop apps for existing businesses or make your own. If you are successful, the profits can be enormous.
If you love writing, this could be a great option for you. Many people don’t realize that running a blog can be a serious business if you work hard and have the patience to make your audience grow. Some bloggers earn as much as thousands a month, but it doesn’t happen overnight.
Once you have an audience, it’s easy to monetize your blog by selling goods and services, by including links in your articles (for which you will receive money if someone accesses the product through your blog) or with paid advertisements.
4. WordPress Theme Developer
If you have coding skills you can use them to create a WordPress theme. People are making new WordPress websites and blogs all the time, but most of them don’t know how to create a theme from scratch. WordPress is a free and open-source website builder and it powers nearly one-third of the world’s websites, from small personal blogs to complex sites of major corporations. it has unique features that make it the most popular content management system in use today.
You can choose to either create a free theme and offer people extra customizable features they must pay for, or you can make a paid theme.