Written by Melissa Miller
An increasing number of recent graduates and seasoned professionals are switching over to the freelance way of life. Freelancers can make a lot of money working for themselves, but they’re also often faced with a great deal of financial uncertainty at times, especially in this economy. On top of this uncertainty, most freelancers have to deal with paying extra self-employment taxes each year and other small business expenses. If you’ve decided to file your own taxes, you may be wondering what you can do to pay the bare minimum and still pass muster. Here are a few tax tips to help make your life easier, your pocketbook wider and help with your cash management.
1. Save up throughout the year
Since you will probably have to pay your regular taxes in addition to the amount of taxes your employer would ordinarily pay in a full-time employment arrangement, you should be setting aside around 25%-30% of each of your paychecks. You’ll use this money to pay your taxes at the end of the year. Even if you plan on claiming a bunch of deductions, it’s still a good idea to prepare to pay more than you expect. Neglecting to set aside money for taxes every time you get paid can really put you in a bind. So, make sure you do this.
2. Keep track of all of your work-related expenses
You can claim each and every one of your work-related expenses as a deduction. This can save you from having to pay a good deal of money to the government. Make sure you hold onto all your relevant receipts. Tax officials will request some of them when you file your taxes, and you’ll want to have all of your other applicable receipts in case you’re audited. You’ll also need to keep track of how often you use things like your computer and your internet service for professional and personal use. You can claim some of the expenses associated with things like your computer and internet service based on how often you use them professionally.
3. Contribute to a retirement account that offers tax benefits
In the U.S., you can deduct any contributions you make to a SEP-IRA. So, contributing to an account of this kind will help you save money for retirement, and it will get you out of having to pay some of what you would ordinarily owe the IRS. As of now, you can save up to 25% or up to $49,000 each year in a SEP-IRA. If you want to get out of paying those pesky self-employment taxes in addition to your regular taxes, a SEP-IRA is definitely one way to do so.
If you’re a freelancer in the UK, you can contribute to a personal pension and get some extra money from HMRC. With a personal pension, you have to pay your regular income tax on all your earnings, but then you get an additional 20% of whatever you set aside in a pension account. So, if you put £300 in your pension account, you’d get an additional £60 in your account from HMRC. Additionally, if you’re taxed more than 20% each year on all of you earnings, you would be able to get even more money from the government to go into your personal pension account.
Freelancers in most areas of the world have access to pension and retirement accounts that provide them with similar tax benefits. So, research pension and retirement account options online, and find the best one for you.
4. Take a tax education class
Paying your taxes as a freelancer is more complicated than paying your taxes as a full-time employee. Because of this, you may find that you have a difficult time filling out necessary tax paperwork and figuring out what you owe. Even if you use tax preparation software, you may still feel a little confused about what you owe the government. Because of this, you may want to look into taking a tax education class to help you understand the ins and outs of paying your taxes as a self-employed person. There may be free and low-cost classes of this type in your area, or you may be able to find useful online courses to help you out. So, explore your options, and avoid paying too much or too little in taxes this year.
Being self-employed has its definite perks, but it doesn’t always put you in a great situation once it’s time to pay your taxes. So, consider the tips above, and do everything you can to maximize the amount of pay you take home.
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