5 Quarterly Tax Tips For Freelancers And Self-Employed Workers
Nearly 64 million Americans did freelance work in 2023 as part of their income generation, which is almost 4 million more than in 2022, according to Forbes. With layoffs happening at large corporations and many workers desiring a more flexible work environment, this number is only expected to rise.
If you are working as a freelancer, the way you will need to file your taxes in the next calendar year will change. As 2024 comes to a close, now is the perfect time to read up on how to best navigate your quarterly taxes as a new freelancer or business owner.
Understand Your Tax Obligations
Freelancers and self-employed individuals are responsible for both income taxes, social security, and Medicare.
According to TurboTax, you are considered to be self-employed if you work as any of the following titles:
- Business owner (including if part-time)
- Partnership member such as an LLC that receives guaranteed payments
- Sole proprietor
- Independent contractor
It is vital to understand your personal tax scenario as a freelancer or self-employed individual. Failure to do so could result in financial repercussions such as penalties and interest charges. In some extreme cases, it could even result in jail time.
Separate Business And Personal Finances
Taking organizational measures may seem like a hassle now, but you will be thanking yourself each time the next tax deadline starts heading in your direction. According to Stellar Bank, commingling personal and business taxes could lead to additional exposure in personal liability.
To ensure you are keeping these expenses separate, consider taking the following actions:
- Open a business checking account and credit card
- Keep detailed records and files
- Apply for a business EIN (tax identifier)
- Pay yourself a salary
These small steps can quickly add up to a solid foundation in your business finances and help to be more transparent in your financial health.
Track And Maximize Deductions
Depending on your different business ventures during the calendar year, you may be entitled to certain deductions. For example, if you took a course in relation to running your business or purchased property for a business office, then these expenses may act as deductions in your overall tax bill. The following are all the different types of deductions to watch out for as part of being self-employed, according to Investopedia.
- Business expenses
- Investments
- Healthcare and health insurance
- Education
- Itemized deductions
- Home used for business purposes
- Car used for business purposes
There are also certain tax credits that may be available in the following areas:
- Family and dependents
- Education
- Healthcare
- Homeowner
- Income and savings
To not lose out on the potential for extra savings, it’s important to keep a running list and track these expenses for when it comes time to file. If you don’t become your own personal advocate during tax season, it increases the risk of paying more in the overall bill total.
Save For Taxes And Automate Payments
If you are a freelancer or small business owner, then you may have an inconsistent income stream — creating challenges for saving enough for taxes. According to CNBC, applying the 50-30-20 strategy is a great rule to have when managing your own income streams. The rule says 50% of your paycheck should go towards things you need, 30% towards things you want, and 20% towards savings and investments.
Setting up automatic transfers to a tax savings account may help with putting money aside up front so you do not have to worry about manually transferring or keeping track by yourself.
Use Tax-Advantaged Retirement Planning
Tax-advantaged retirement accounts will help you to stretch your money for longer while also planning for your future retirement. While there are many ways to diversify your income portfolio, these are a few of the more common methods that will help to provide ample savings:
- Tax-deferred accounts: 401(k)s, 403(b)s, and traditional IRAs
- Roth accounts: Roth 401(k)s and Roth IRAs
While each of these account types all have their unique benefits, it’s best to find out which one(s) apply to your personal business scenarios.