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Ah, tax season. Whether you’re a business owner, independent professional, or a freelancer, tax season tends to be a time of year that strikes fear in the hearts of many.
For freelancers in particular, tax season can be particularly stressful as the burden of keeping all the important documentation rests squarely on their own shoulders. And if you’re new to the world of freelancing, tax season sets off the mad dash to compile all that paperwork you didn’t know you were supposed to keep.
But what if we said that tax season doesn’t need to be so stressful? Before you raise a skeptical eyebrow, know this: If you keep tax season at the back of your mind throughout the entire year, then tax season can be easy — even breezy — for freelancers such as yourself.
Here’s why freelancers should be thinking about tax season all year long.
Not all income is the same
Sally is a freelance graphic designer with eight clients. With four of those clients, Sally is an independent contractor, which means there were no tax forms or documentation completed. But two of her other clients have W9 forms on file for her. Yet another has a 1099 form on file, and Sally is technically a W2 employee of the eighth and final client.
So is all of Sally’s income the same? Maybe from Sally’s perspective it is. After all, the income Sally makes from her W2 client pays the same bills as the income she makes from the clients without tax documentation. But the IRS doesn’t see it that way.
One of the biggest benefits to being diligent about your taxes year-round is that it’s so much easier to keep track of different types of income on a week-to-week basis. After all, different types of income are taxed differently, so you’re left with two choices: You can either let your income accumulate throughout the year and then scramble to sort through all those payments during tax season, or you can do some bookkeeping throughout the year.
Depending on what type of income you make from your clients, it’s possible that you’ll owe taxes on your income when it comes time to file your taxes. And depending on how much income you make, you could potentially owe quite a bit, which requires you to have set aside funds to pay those taxes. So what happens if you didn’t expect to owe on your taxes and, thus, don’t have the funds available to pay them?
Granted, this scenario isn’t the end of the world. If you owe more taxes than you can pay in a single installment, you can contact the IRS to make payment arrangements. But this is the sort of thing you’d know ahead of time if you’re keeping track of your income and taxes throughout the year.
Don’t forget your deductions
When you work for an actual company, the company usually covers any expenses that are associated with your duties. For instance, if you do a lot of traveling for your job, your company will likely provide a mobile phone, company car, or some type of allowance for such things. But when you’re a freelancer, the things you need to do your job — e.g. an Internet connection, special tools or software, office space, etc. — are your responsibility. Depending on what type of freelance work you do, these expenses can get quite… well, expensive.
According to Xero, an accounting services and software company, 73 percent of freelancers don’t deduct their work-related expenses. So all of services, supplies, and products they need, even the mileage on their cars and any licenses or registration fees they pay to do their jobs, essentially eat into their income. What they don’t realize is that they can deduct for many of these expenses on their tax returns, which will offset some, most, or even all of these associated costs.
Speaking of Xero, the company offers a useful program that countless freelancers and small business owners have used for bookkeeping. Often compared favorably to QuickBooks, Xero has a plethora of additional features that are particularly useful for freelancers, including invoicing, expense management, tax preparation, budgeting, and more.
Estimated and owed taxes
We mentioned the importance of tracking the taxes on your income throughout the year, but it warrants repeating here, especially because it can actually get quite complicated.
People who are employed by actual companies have the luxury of having their taxes automatically calculated and deducted from their paychecks, saving them the trouble of having to do this themselves. For freelancers, the burden of making sure that you’re paying your taxes falls squarely on your shoulders. Since you don’t want the IRS coming after you for not having paid your taxes, this is another important reason for freelancers to be thinking about (and preparing for) tax season throughout the year.
When it comes to tax on your income, there are two main types: estimated taxes and owed taxes. Freelancers don’t usually have an exact dollar amount when it comes to their taxes owed, so they estimate their income taxes, and this is the amount that’s paid to the IRS. And if you make these payments throughout the year, you’re not hit with a large bill to the IRS when tax season rolls around.
Speaking of estimated taxes, that brings us to our final point…
Has it become too much to handle?
As helping as software like Xero or QuickBooks can be, estimated tax on your income can get tricky. If you’re a freelancer with lots of work-related expenses (and potential deductions), it can get even more confusing, especially as you try to keep track of all your receipts and expense records. So it’s worth considering the option of having a professional accountant to help you manage your finances.
Sure, hiring a professional to monitor and maintain your finances incurs an additional expense, but it can net you some significant savings as you’ll have someone who’s experienced with filing tax returns for freelancers. Even better, you’ll have someone on your side who can point out all the deductions and credits you wouldn’t have otherwise known about.
Dane O’Leary is a writer, tech journalist and regular contributor to TrustRadius where he shares his knowledge on the latest trends in B2B news and technologies. He has written editorials, articles, and blog posts for some of the most popular publications on the web, including Android Authority, Phone Arena, NeilPatel.com, and Millennial Magazine while also publishing regularly on his own website.