As I approach my eighth year of freelancing, I look back on the ups and downs I’ve experienced – joyous moments, tough times, and significant achievements. While earning extra money through freelancing is rewarding, it’s crucial to stay aware of the tax obligations. I’ve made my share of tax mistakes, and I hope sharing them can help you avoid the same pitfalls.
I love the flexibility that comes with freelancing, and I know many others feel the same. With today’s economic challenges, including inflation, more people are looking into side gigs and additional income sources. It’s important to remember that if you make more than $400 a year from freelancing, you need to report that income on your taxes.
One of the first lessons I learned was to set aside money for taxes. When I started freelancing, I was fortunate to know successful bloggers and freelancers who emphasized the importance of saving part of your earnings for taxes. Even though I was unsure of my potential earnings in 2015, I managed to make about $9,000 from freelancing that year. Thankfully, I took their advice and put away around 25% of that income for taxes.
However, I did make several tax mistakes early on in my freelancing journey. Here are four mistakes to avoid:
1. Not opening a business bank account:
When I first started making money from freelancing, I didn’t think about setting up a separate bank account. I was just focused on earning extra cash to pay off my debts. This made managing my finances complicated, especially during tax season. Opening a business bank account can simplify tracking your income and expenses, making tax filing a lot easier.
2. Missing the quarterly tax deadline:
Before freelancing, I was used to filing taxes once a year by April 15th. But as a freelancer, you have quarterly tax deadlines because taxes aren’t automatically deducted. I missed these deadlines initially and got penalized. Now, with my accountant’s help, I make sure to meet these deadlines to avoid penalties.
3. Poorly tracking monthly expenses:
Many freelancers don’t keep a close eye on their business expenses, which you can write off at tax time. I struggled with this during my first two years, but using bookkeeping software to track and categorize transactions has made it much easier.
4. Not cross-checking income records with 1099 forms:
Everyone makes mistakes, including your clients. Sometimes they report incorrect amounts to the IRS. Always double-check the numbers on your 1099 forms against your records to avoid discrepancies.
In summary, although I made several tax errors early in my freelancing career, hiring a CPA who understands freelancing was a lifesaver. Freelancing involves a steep learning curve, but take the time to educate yourself and learn from others’ mistakes to avoid similar pitfalls.