by Jonathan Medows

While many people equate a freelancing career with a constant struggle to make ends meet, for some professional freelancers, quite the opposite is true—being self-employed allows them to unlock their true earning potential. However, successful freelancers and entrepreneurs tend to fall into one of two categories: those who made money, made a difference for others, and remain financially stable; and those who “live in the moment” and never achieve long-term financial security. The difference between these two groups is planning–tax planning, asset protection planning, and retirement planning.

*Put More Money in Your Pocket with Effective Tax Planning *

As a freelancer, your financial picture becomes more complex than the average employed individual, and once you hit high-income earning territory (defined as making $200,000 or more as an individual or $250,000 if you are married and filing your taxes jointly), things can get even more challenging. This is when tax planning can pay serious dividends—allowing you to put more money in your pockets—instead of those of the IRS.

For example, if your business is growing and changing, tax planning can help you reduce your tax burden through proper entity selection (i.e. LLC, Sub-S, C Corp, FLP, or Trust) as well as taking into consideration where your business is located and where your tax home is, which might be different. In addition, tax planning can help you avoid (or at the very least soften the impact of) the special taxes levied on high-earning individuals including the Alternative Minimum Tax, investment taxes, the Medicare surtax, and hefty estate taxes.

Make Sure You Cover Your Assets

If you have created and own marketable assets such as IP addresses, patents, trademarks, and the like as part of your freelance career, asset protection planning can help you avoid issues that could impact your ownership and/or control of them, as well as the right to use or profit from them in the future. In essence, asset protection planning can allow you to release legal title of your assets (protecting you from legal action related to them or seizure of your personal assets from creditors), while still allowing you to continue controlling and enjoying the economic benefits of them.

Rev Up Your Retirement Accounts

Even if you’re 40 years away from retirement age, it’s time to get serious about saving for your golden years. When you work for a company, it’s easy to contribute to a 401(K) where you can stash pre-tax dollars—and easily cut your taxable income. However, as a freelancer you are responsible for establishing your own retirement savings plan such as a SEP (Simplified Employee Pension), IRA, or a one-individual 401(K). You can contribute as much as 25% of your net earnings from self-employment (not including contributions for yourself), up to $51,000 for 2013, and $52,000 for 2014 in these types of plans. The benefit to you is two-fold: You save for retirement and you reduce your taxable income.

Consider Alternative Retirement Income Vehicles

In addition to standard retirement savings plans, as a high-income earner, you may want to consider purchasing life insurance inside of a 401(K) or a defined benefit plan for several reasons such as providing for your family if you do not make it to retirement age, funding a buy sell agreement with business partners, or paying a non-taxable death benefit to your heirs.

The annual tax-deductible contributions to these plans range from approximately $90,000 for a 30-year old individual to about $300,000 at age 60. These plans retain the cash value or your basis in the policy at your death, and the death benefit beyond that amount is paid to the beneficiary that you select.

*Start Today to Protect the Fruits of Your Freelancing Success *

Engaging in proactive tax, asset protection, and retirement planning is the key to preserving and growing your hard-earned freelancing income and assets over the long-term. Many of the strategies outlined above offer significant financial benefits, however, they also involve becoming intimately familiar with the IRS tax code, so you may wish to consult a tax or financial professional for additional guidance.

Jonathan Medows is a New York City based CPA who specializes in taxes and business issues for freelancers across the country. His website, www.cpaforfreelancers.com, has a resource section with how-to articles and information for freelancers.