This article is brought to you by our partner, Keeper Tax.
Happy New Year! For those of us that have “build better financial habits” on our list of resolutions, we’ve put together this quick list of the top tax tips we share with our freelancers. Like with everything we do at Keeper Tax, we’ve kept these tips simple, and with minimal jargon. Enjoy!
#1 Every paycheck, set aside money for taxes
For freelancers, taxes are not being withheld automatically from your income, as they would be for traditional employees.
To avoid a nasty surprise at the end of the year, we generally recommend you estimate your freelance tax rate and set aside that much of each paystub. For reference, most freelancers should expect to set aside between 20% and 40%.
#2 Know your tax write-offs, and track them year-round
If you’re a veteran freelancer, you’re probably familiar with the feeling of dread that sets in at tax time if you didn’t track your receipts throughout the year. To avoid this, and to make sure that you don’t end up overpaying on taxes, we recommend studying up on your write-offs and having a system to keep track of them.
Here are some examples of tax write-offs freelancers can claim: ⛽ gas fill-ups, 🚌 public transport, 📶 phone bills, ☔ insurance, 🍽️ some restaurant meals, 📱phone apps, and more!
Want to learn more? Check out our tax write-off guides
But be careful! Certain types of write-offs are monitored closely by the IRS and claiming them will put you at risk of audit. Some examples include: clothing purchases, personal hygiene costs, and excessive restaurant expenses. Don’t worry — tax filing software like Keeper Tax will automatically alert you if your tax return might be considered suspicious.
#3 Pay estimated taxes 4x per year … to avoid the penalty
Quarterly tax payments, also known as estimated taxes, are required for most freelancers. This means tax payments are due four times throughout the year. This helps ensure that you don’t get caught off guard with your annual tax payment. People who don’t make these payments owe a penalty at the end of the year.
Will I be penalized? Find out with our free quarterly tax calculator
While filing taxes four times a year can sound scary, it’s actually not so bad. Tools like Keeper Tax will make the payments on your behalf and take just a few minutes to set up.
#4 Don’t be afraid to claim the home office deduction
If you freelance from your home or apartment, it’s likely that you can claim the valuable home office deduction. This includes administrative work, or even job-seeking activities.
Many first-time freelancers assume that in order to claim the home office deduction, they must have a separate room used as an office inside of their home. However, the rules aren’t nearly that strict.
As long as you have a space inside your home or apartment that can qualify as a workstation — i.e. you don't use for extensive personal activities — you can claim the home office deduction. This means you’ll be able to write off a portion of your rent or mortgage interest, as well as all utilities and home maintenance expenses.
#5 All of this applies even if you only freelanced part-time
Unfortunately, even if you only freelance part-time, you should still do #1 - #4. There is no such thing as a standard deduction for your self-employment expenses — every single write-off you can claim on taxes will save you money. Also, it’s very possible that you’ll still need to make quarterly tax payments unless you or a spouse also has full-time employment income where taxes are withheld.
Do things right, and you’ll have a tax-stress-free new year!
Many first-time feel like they owe a lot simply because they’re paying penalties and not claiming enough tax write-offs at the end of the year. It can also feel like a lot because taxes aren’t being withheld from your paystubs, as they would have been with a traditional employer. However, for most freelancers, there are enough tax write-offs you can claim to cut your tax bill significantly.
If you aren’t great about tracking your own expenses or staying on top of quarterly tax payments, you may want to try Keeper Tax. Freelancers Union members get a special discount, here.