Have you ever heard of phorophobia? I had it (and still have it), but I didn't have it either. It refers to fear of taxes and the IRS. I think many new and veteran freelancers alike can relate to this sentiment.
Embarking on a self-employment journey is an exciting adventure, but filing taxes can be complex and daunting. From creating a 1099 to figuring out how to claim eligible business expenses, the entire filing process can be difficult, not to mention expensive.
But it doesn't have to be that way. Whether you file using online tax software or work with an accountant, here are seven tax tips that will save you money, time, and headaches.
read more: IRS Delayed 1099-K: What PayPal, Venmo, and Cash App Users Need to Know This Tax Season
1. Organize your receipts digitally
When you're stuck paying taxes on the income you earn, you want to take advantage of every business tax deduction you can to offset your bill. Keeping detailed records of all your expenses is critical to maximizing your deductions and reducing your taxable income. Everything you spend on your business can be deducted, from office supplies to business-related travel expenses.
One common pitfall for new entrepreneurs is not habitually tracking business expenses. When I first started, I kept all my receipts, but I didn't keep them in one place. I tossed them into random drawers and boxes. This caused confusion when filing taxes.
These days, I take photos of each expense and email all receipts to myself. Then save the paper receipt in a folder in your inbox so you can throw it away.
You can also use accounting software like Xero or QuickBooks, or an app like Expensify to streamline this process and make sure you don't miss any deductible expenses. However, once you find the system that works for you, you don't have to download fancy software or pay anything.
2. Don't overlook small tax-deductible expenses
Don't underestimate how quickly small business expenses can turn into big tax savings. It's easy to write off small expenses as unimportant. But if you have a few small expenses each week or month, you may need a larger deduction come tax time. And little by little, you can further reduce your tax bill.
For example, I often stopped at a 100-yen store to buy an item or two on my way to a business event. And since I was only spending a few dollars, I sometimes didn't bother including those receipts in my expense reporting system.
After almost 10 years of being an entrepreneur, I regret it. Because a dollar here and there can easily grow into hundreds of dollars over time.
3. Charge an initial fee
Like many entrepreneurs, I had no idea that I could claim expenses incurred before I officially started my business as business expenses on my tax return. For example, startup costs include researching potential new markets and products, advertising to promote the business before opening, paying employees to undergo training, and traveling to meet potential partners. There is a possibility.
Researching and understanding the eligibility criteria for these deductions can significantly improve your initial tax return. If you're not sure whether an expense qualifies, just save all receipts and consult a tax professional.
4. Think of quarterly taxes as a convenient check-in, not a chore.
Unlike traditional employees, who have taxes withheld from each paycheck, self-employed individuals are responsible for paying taxes on a quarterly basis. It's an embarrassing story, but I didn't know about it during my first year in management. When tax time came around, I learned that if I didn't pay my taxes quarterly, I could be subject to penalties and interest on top of the taxes I was due, of course. Fortunately, my liability wasn't that great, but since then I've been careful not to be surprised by a deadline again.
As you might have guessed, quarterly estimated taxes must be paid four times a year. For 2024, there are three annual payment deadlines (April 15, June 17, and September 16), with the last payment due on January 15, 2025. You can create reminders and plan to set aside money. Important for staying compliant with tax laws. I set up regular calendar reminders every three months to make sure I paid my quarterly taxes on time. You can keep this money in a high-yield savings account and earn interest while you leave it alone.
While it may feel bad to part with some of your money every quarter, you now see it as a blessing rather than a curse. I'd rather pay a small amount of taxes throughout the year than be stuck with a large bill and potential penalties later on. Plus, you can now get guidance from a tax professional who can provide you with quarterly estimates to make sure you're paying the right amount.
read more: Expert tips for calculating estimated quarterly taxes
5. Consider tax benefits for retirement savings
If you are self-employed, the intersection of retirement planning and tax benefits is important. I see a lot of entrepreneurs who work hard but feel like they have nothing to show for it in long-term savings.
Contributing to a retirement plan like an IRA or 401(k) not only provides immediate tax benefits, but can also help you retire early from your business if you don't want to work hard into retirement. .
When I first left my corporate job to pursue entrepreneurship, I had no idea I could create my own 401(k) for my business. It never occurred to me that such a thing was possible, and no one mentioned it in the various entrepreneurial communities I joined. Currently, I contribute the maximum amount allowed by the IRS and have a 401(k) that gives me a match and a profit share.
Even if you're a freelancer, contributing to a Roth IRA can make a big difference to your net worth.
6. Make your home office a haven
If you run your business from home, even part of the time, you may be able to deduct related expenses, such as:
- Homeowners insurance.
- Fixed asset tax.
- home repair and maintenance.
- computers and accessories.
- shelves and decorations.
However, the IRS requires a dedicated, dedicated space in your home to qualify as a home office. If you work from your living room coffee table, you are not eligible.
I was very frugal when I first started my business, and I'm glad I did because that habit allowed me to grow my business without taking on more debt. In retrospect, getting his office organized during his first year would have gone a long way in helping him be more productive and take pride in the business he was building. You won't get back all the money you spend updating your home office, but if it increases your productivity and therefore your bottom line, it's a worthwhile expense in my opinion.
7. Consider investing in a tax professional
I value entrepreneurship and a hands-on approach, and for the first four years of my business I did my own bookkeeping to save money. But it's one of my biggest regrets as an entrepreneur. Although I'm a money coach, I'm not an expert on tax law or a fan of categorizing hundreds of expenses in accounting software. My time and energy could have been better spent developing new clients and improving the program.
We understand that many people starting a business don't have a lot of money to spare, but hiring a qualified accountant or tax professional can save you time, reduce mistakes, and ensure you comply with tax laws. can. Plus, it could potentially save you money in the long run. At the very least, this investment will allow you to spend more time with friends and family that you don't get to see as much while you grow your business.
Investing in professional expertise allows you to focus on what you do best, while leaving the complex tax filing tasks to tax experts. Additionally, you can amortize your business' tax preparation costs to further reduce your tax liability.
Even if it's your first tax season as a freelancer or business owner, there's no need to feel overwhelmed. There is a learning curve, but it gets easier over time.
Additional tax advice: