Tax season can be particularly daunting for freelancers and small business owners. Unlike traditional employees, they don’t have taxes withheld from their paychecks and must instead pay self-employment tax, federal income tax, state income tax and local levies themselves.
Effective tax planning helps lower the amount owed each year while fulfilling obligations. Here are some key tax-planning strategies:
Set Up a Separate Savings Account
Freelancers should create separate savings and credit accounts specifically for business transactions. This can make tax time significantly less stressful by showing how much income was generated versus expenses incurred; also making it easier to monitor spending patterns, set aside enough for quarterly estimated taxes, take advantage of tax deductions/credits etc.
At tax time, mixing personal and business expenses in one bank account can be a cumbersome hassle that opens you up to IRS audit. Furthermore, budgeting irregular income streams is made much simpler, since you can easily see at a glance how much is coming in each month; additionally, overspending can be avoided when periods are more prosperous, while any unexpected costs will be covered when times become lean.
Make Quarterly Estimated Tax Payments
As we move into 2023, it is crucial that entrepreneurs and freelancers keep accurate financial documents up-to-date. This includes keeping an accurate accounting of income and expenses for business operations; reconciling bank/credit card statements monthly; using cloud accounting software like LZ Books or QuickBooks Online for bookkeeping services if applicable. Keeping accurate records provides you with real-time visibility into your company so you can make smart tax planning decisions.
One of the most critical steps you can take is making quarterly estimated tax payments. Independent contractors, small businesses, and freelancers who owe penalties must submit payments each quarter; otherwise the IRS will charge interest on them and interest will accrue for late payment. Spreading these payments over the year makes payments more manageable compared to trying to come up with one large lump sum payment at tax time – you can calculate quarterly payments based on what was owed last year or using an annualized method.
Take Advantage of Deductions and Credits
As a business owner, you can significantly decrease the taxes you owe by taking advantage of deductions and credits. These tools help reduce tax liability in different ways – credits directly decrease your total bill while deductions subtract income before calculating how much is due.
As a freelancer who spends much of their time traveling, mileage expenses may be deductible, along with fees paid for online services and software such as Hurdlr, Podio and ZenDesk. Membership dues to organizations that support your professional interests like Association of Writers and Writing Programs may also be tax-deductible.
Employing these and other strategies can help your company lower its tax burden and save more profits for future expansion. A knowledgeable tax advisor can recommend strategies tailored specifically to your business and personal circumstances; more taxes saved means more money invested back into expanding it further.
Work with a Tax Professional
As summer draws to a close, freelancers may turn their focus back to taxes. While tax planning should be undertaken throughout the year, freelancers need to prioritize tax preparation now so as to maximize deductions or decrease future obligations – such preparation will save both time and money in future years.
As part of tax planning, the first step should be identifying your business structure. Your choice (Sole Proprietorship, S-Corp, LLC or partnership) has an enormous effect on your tax liabilities; to make sure you use the ideal structure for your needs it is wise to consult a tax professional beforehand.
Utilize all available deductions and credits. Capital loss carryover from prior years or foreign tax credit carryover could help offset future taxable income, as can keeping abreast of new laws that could impact you personally. Finally, utilize digital tools designed to simplify bookkeeping and receipt management for a less stressful tax season experience.
