The liberating feeling of going freelance is intoxicating, but realizing that you need to get a handle on your new taxation obligations could sour the mood a bit.
Learning from mistakes others make is better than succumbing to the same foibles yourself, so let’s look at frequent self-employed tax snafus that need to be on your watch list as a first-time freelancer.
Failing to keep a record of write-offs
It’s essential to make sure you understand self-employment tax so that you don’t overpay unnecessarily, especially during those early stages of your freelance career where every penny counts.
If you don’t track your expenses and deductibles with thorough paperwork, whether physical or digital, you could struggle to complete your tax return with all the right info included.
Worse still, you might not be writing off certain costs that you are eligible to deduct from your tax bill. There is a long list of deductions to familiarize yourself with, covering everything from your household bills to your car and beyond.
Forgetting to save cash to pay your tax bill
The next major pitfall which scuppers many a self-employed individual is not remembering to put aside a proportion of the income they generate to cover the tax bill they’ll eventually face when the financial year draws to a close.
You might be used to getting tax taken off before you receive a paycheck from your employer. But if you suddenly move to sending out your own invoices and getting paid in full by clients, the new responsibility of not spending all of this outright has to be taken seriously, or else penalties will apply.
Missing the deadline for filing
Once you have accumulated a year or two of experience as a self-employed person, you’ll get into a rhythm when it comes to recording tax info and also filing your return. However, if you’re new to this process, or you’re generally a disorganized person, missing the deadline for submitting it could be a real risk.
Modern tax software for freelancers can minimize this thanks to automated alerts that act as a prompt to get you to hit deadlines rather than watch as they fly by.
Not getting an accountant
Having an accountant to handle your taxes on your behalf may sound like a luxury, but for anyone who’s self-employed, it’s arguably a necessity.
Without an accountant, it’s much more likely that you’ll make any one of the mistakes mentioned so far. Conversely if you have a CPA on your side, they can make your life so much easier.
Obviously you’ll have to pay to secure the services of an accountant. But since you may be able to claim these costs back against your tax bill anyway, there’s really no excuse to avoid this.
Sticking with a personal bank account for business use
The easiest way to make tackling tax as a freelancer less stressful and confusing is to switch to using a business bank account for all of your professional needs.
If you don’t, you’ll be stuck using your personal account for all of your incomings and outgoings. And of course this will become an administrative nightmare.
With a separate business account, everything you do for work can be kept in one place, and thus reporting your taxable earnings and detailing your expenses and deductibles will be much less challenging.
Not making changes when they are needed
Last but not least, if you are self-employed and you still struggle to stay on top of your tax obligations after a few years as a freelancer, then you need to change your approach, because something is clearly not working.
The worst thing you can do is simply stick to your guns because you are paralyzed by the prospect of switching things up. Again, working with a professional accountant is sensible if tax is just too much to tackle on your own.