10 Must-Know Tax Tips for Freelancers

There are many things to love about freelancing. Better work-life balance; the option of choosing your own work hours and clients; not having to deal with backstabbing workmates; and having a gin and tonic with lunch from time to time – just because you can — come quickly to mind. Filing your taxes just ain’t one of them.

Launching your own business requires careful planning and preparation, particularly when it comes to taxes. Here are 10 tax tips for every new freelancer, to help take some of the sting out of the tax season.

1. Deduct your Expenses, All of Them


One of the few tax benefits of being a freelancer is you can deduct all legitimate business expenses. Make the most of it. Deductible expenses include everything from paper clips to airline tickets and declaring them correctly can make a huge dent in your taxable income.

2. Keep Meticulous Records

When claiming business expenses it is important to keep detailed records. If there’s an audit, you will need to present receipts to justify the deductions you made on your tax returns. The IRS has a ten-year statute of limitations for auditing tax returns, so it’s a good idea to invest some time and resources in an efficient tax filing system.

Do yourself a favor and download a receipt filing app, such as OneReceipt, Shoeboxed or Wave, to your smartphone. These programs are a great way to get rid of those pesky paper receipts and organize them in a single electronic database.

3. Open Up A Retirement Savings Accounting

Piggy Bank with retirement formula

When you are your own boss, you forsake the luxury of monthly employer contributions to a 401(k). However, freelancers do get a valuable perk when it comes to retirement savings: Simplified Employee Pension plans, also known as a SEP. A SEP not only allows you to build retirement savings, it is also a great way to shelter your business profit from the taxman. The IRS allows you to deduct up to 25 percent of your earnings or $50,000, whichever is less. Not bad when you consider the maximum contribution toward an IRA in 2014 was $5,000 ($6,500 if you were over 50).

4. Buy Health Insurance

If you have recently braved the world of freelancing, you’re probably still shell-shocked by the cost of health insurance premiums. Losing health benefits is what stops many workers from taking the leap into self-employment in the first place.

The good news is that, as a freelancer, you can deduct all your health care insurance premiums — which include COBRA costs, if you are transitioning from a previous job. Sadly, health insurance deductions only reduce your income tax not your self-employment tax. A neat way around that is to hire your spouse and provide her with family health insurance coverage. This works because health insurance coverage for employees is an expense that reduces both your income tax and SE tax.

5. Set Up a Home Office

Tax Tips for Freelancers

Freelancers often shy away from claiming their home office as a deduction because they fear it might trigger an IRS audit. However, if you use your home office exclusively for work, you should take the deduction. IRS Publication 587 has detailed guidelines to help you determine if your office qualifies for the deduction and instructions on how to calculate the total dollar amount you can claim.

Another reason for claiming your home office is that, since 2014, the filing process has been streamlined. Now freelancers with eligible home offices can choose to simply claim $5 per square feet for their home office expenses, up to a maximum of 300 feet: or $1,500.

6. Open A Separate Business Account

A simple yet effective way to organize your business expenses and separate your personal assets from your business is to set up a different bank account for your business. Then get a separate credit card to pay for your business and healthcare expenses. Choose a business-specific card (compare these on NerdWallet) with a generous points or cash back program.

Not only will it help you track your cash flow, you’ll feel closer to your next vacation every time you go shopping for office supplies or fill your tank. It will surprise you how quickly you can build up enough points to pay for a flight to Europe. The best thing: the IRS doesn’t tax credit card rewards. It considers them as a rebate, as long as you didn’t have to place a deposit in a savings account to receive them.

7. Report All Your Income And Pay On Time

Tax Tips for Freelancers

Don’t mess with the IRS, you will lose. When there’s nobody looking over your shoulder, it is tempting to leave part of your income out of your tax return. How could the IRS ever find out? You may ask. Well it can and it does. Every client that pays you more than $600 is required by law to file a 1099 Form with the IRS detailing how much you were paid. If there is a discrepancy between the income you declared and what your 1099 forms say, you will have to pay the balance with interest and penalties to boot.

Report your income accurately and pay your taxes quarterly. The IRS wants you to pay your taxes as you earn them, just like at a regular day job. So if you expect to have a tax liability of at least $1,000 by the end of the year, you should pay taxes every three months. That’s one of the not-so-exciting perks of being a freelancer, tax season is all year round.

8. Open a Separate Tax Savings Account

Don’t make the mistake of thinking all that freelance money is yours to keep. Uncle Sam owns a big chunk of every check you earn. To avoid the temptation of spending money that isn’t yours, open a tax savings account separate from your personal savings account. Get in the habit of depositing around 30 percent of every check you receive. It will still hurt to part with your hard-earned cash, but it will feel nice to have the money set aside to pay your taxes outright.

9. Maximize Your Travel Expenses

Tax Tips for Freelancers

If you need to travel for work, you can deduct 100 percent of your airfare, taxi ride, train ticket, and hotel stay. Make the most of your tax deduction by combining pleasure with business. As long as the main purpose of your trip is work related – in other words, you spend more days on business than on vacation — there’s no reason you can’t build a mini-vacation around your business trip and deduct all the traveling costs. Even if you don’t travel for work, you can deduct standard traveling costs, such as your mileage (56.5 cents a mile in 2014), the cost of parking, and tolls when you drive to see a client or to do a job. The key is to keep detailed records of your business driving. Otherwise, the IRS could deny your deduction on audit.

10. Hire a Tax Preparation Professional with Experience Dealing with Freelancers

While you may have been comfortable doing your own taxes as an employee, preparing your taxes as a freelancer is much more involved, particularly when it comes to deductions. Don’t be too proud to ask for help. Believe it or not, there are these people called tax professionals who have chosen to make a full-time career out of reading IRS documents.

These amazing people have sacrificed their sanity to help you maximize your deductions and avoid expensive mistakes that could trigger audits and expensive tax penalties. With their assistance you can make educated choices on questions you may have never thought of — or even heard of — such as whether you should depreciate your business assets annually using the Modified Accelerated Cost Recovery System or in a lump sum via Section 179.

SuperMoney has a list of all the top firms who can help you with your Tax problems listed here, do check them out.

The bottom line is be prepared. Be smart. Plan ahead and don’t allow taxes — of all things — kill the joy and satisfaction of being your own boss.

This article was written by staff writer Andrew Latham. His mission is to help fight your evil debt blob and get your personal finances in tip top shape.
Photos: Flickr