As I approach my eighth year of freelancing, I reflect on the rollercoaster of experiences it has brought – joyful moments, challenging times and invaluable accomplishments. Earning additional income through freelancing is gratifying, but it’s essential to always be aware of the tax implications. I’ve learned from my tax errors and it’s my hope that you can learn from them as well.
Earning a flexible income is something I greatly appreciate, and it’s clear that many others share this sentiment. Given the current economic challenges including inflation, an increasing number of individuals are considering side jobs and diverse income streams. Please note, if you generate more than $400 annually via freelancing, you are required to report that income in your taxes.
It’s essential to set aside money for taxes. When I began freelancing, I had the privilege of knowing other successful bloggers and freelancers who stressed the importance of saving part of your freelance earnings for tax purposes. Despite uncertainties around potential earnings and the degree of success in 2015, I managed to accumulate approximately $9,000 from freelancing alone that year. I’m grateful that I heeded the advice and reserved around 25% of this income for taxes.
Nevertheless, I made several tax mistakes as a beginner in freelancing. Here are four errors that you should avoid:
1. Neglecting to open a business bank account:
When I first tasted success in freelancing, the idea of establishing a separate bank account never occurred to me. I was simply focused on earning extra income to settle my debts. This oversight complicated my finances, making it difficult to separate my freelance earnings from traditional wage income during tax season. Opening a business bank account is crucial to streamline tracking of freelance income and expenses for hassle-free tax filing.
2. Missing the quarterly tax deadline:
Prior to freelancing, I was accustomed to filing my taxes once a year before April 15th. However, as a freelancer, there are quarterly tax deadlines to meet, given that taxes aren’t automatically deducted. Initially, I was penalized for failing to meet these requirements. Through close communication with my accountant, I now ensure to meet these deadlines to avoid penalties.
3. Poorly tracking monthly expenses:
One frequent mistake freelancers make is not adequately monitoring business expenses. Recording these expenses allows you to write them off at tax time. I greatly struggled with this during my first two years of freelancing, but a simple solution such as using a bookkeeping software to track and categorize business transactions can alleviate this stress.
4. Failing to cross-check income records with 1099 forms:
Humans naturally make errors, including your clients. It’s possible they report incorrect amounts to the IRS, so always cross-check the figures on your 1099 forms with your records to avoid potential discrepancies.
In summary, while I made several tax mistakes in my early freelancing career, my decision to hire a CPA experienced with freelancers from the onset was a saving grace. Freelancing offers a deep learning curve, but take the time to learn, and if possible, learn from others to save you from certain pitfalls.
