Basic Tax-Savvy Tips for the Self-Employed
The gig economy is growing. Since the pandemic-era surge, more professionals have embraced freelance and contract work out of sheer necessity in the wake of layoffs or for flexibility and autonomy. However, with that freedom comes added responsibility—generating a steady stream of revenue, managing contracts and subcontracts, and, not the least, planning and managing tax obligations.
Whether you’re a freelance writer, designer, consultant, rideshare driver, or other solopreneur, understanding self-employment taxation can help you keep more of your earnings and avoid surprises when it’s time to file. Here are some of our team’s top essentials for freelancers and gig workers.
1. Understand Your Tax Responsibilities
Unlike traditional employees, freelancers and gig workers don’t have taxes automatically withheld from their income. Instead, you’re responsible for calculating and paying:
- Self-employment tax: Covers Social Security and Medicare, currently 15.3% of net earnings.
- Income tax: Varies based on your total income and tax bracket.
- Quarterly estimated taxes: Since taxes aren’t withheld from freelance income, the IRS requires you to make estimated tax payments four times a year if you expect to owe at least $1,000 in taxes.
2. Keep Detailed Records of Income and Expenses
Proper record-keeping is crucial for tracking earnings and ensuring you take full advantage of deductions. Use accounting software such as QuickBooks® or a simple spreadsheet to document these inflows and outflows of cash:
- Payments received from clients or platforms
- Invoices sent and received
- Business-related expenses (more on this below)
- Mileage logs if you drive for work
- Receipts for deductible expenses
3. Take Advantage of Deductions and Credits
Freelancers can reduce taxable income by deducting legitimate business expenses. Common deductions include:
- Home office deduction: If you use part of your home exclusively for work, you may deduct related expenses such as rent, utilities, internet, security, etc.
- Supplies and equipment: Computers, software, office furniture, and business-related subscriptions are deductible. If you work in the trades, you can deduct tool purchases, personal protective equipment, and other supplies.
- Vehicle expenses: If you drive for business, you can deduct mileage or actual expenses like gas and maintenance.
- Marketing and advertising: Costs for website hosting, social media ads, and business cards are all deductible.
- Professional development: Online courses, continuing education, certifications, and industry conferences can be deducted.
It’s important to understand the difference between tax deductions and tax credits. A tax deduction reduces your taxable income, which in turn lowers the amount of tax you owe. For example, if you earn $50,000 and have $5,000 in deductions, you’re only taxed on $45,000. A tax credit, on the other hand, is a dollar-for-dollar reduction in your tax bill. If you owe $3,000 in taxes and qualify for a $500 tax credit, your final tax bill drops to $2,500. Both can help lower your tax burden, but credits typically provide greater direct savings than deductions.
4. Keep Business and Personal Finances Separate
To make tax time easier, open a separate business bank account and, if possible, a business credit card. This helps you keep track of income and expenses without mixing them with personal transactions. It also simplifies record-keeping and can provide clearer financial insights.
5. Set Aside Money for Taxes Regularly
Since taxes aren’t automatically deducted from your earnings, it’s essential to set aside a portion of your income for tax payments. A good rule of thumb is to save 25%-30% of your income to cover federal and state taxes. Consider setting up a separate savings account to sequester your tax reserves.
6. File Quarterly Estimated Taxes
Freelancers and gig workers are required to pay estimated taxes four times a year. The deadlines typically fall on these dates:
- First quarter: April 15
- Second quarter: June 15
- Third quarter: September 15
- Fourth quarter: January 15 (of the following year)
Failing to make these payments could result in penalties, so mark these dates on your calendar and set reminders. You can make quarterly estimated payments online at IRS.gov.
7. Consider Forming an LLC or S Corp
As your freelance income grows, you may benefit from structuring your business as an LLC (Limited Liability Company) or S corporation. These structures can offer tax advantages, liability protection, and more credibility with clients. Consulting a tax professional will help you determine if this is the right move for your business. Our team is here to help you.
8. Look to Our Team for Advice
Freelance taxes can get complicated, especially as your business grows. Our tax team can help you maximize deductions, stay compliant, and potentially lower your tax bill. Many freelancers find that the cost of professional tax services is well worth the savings and peace of mind.
9. Stay Up to Date on Tax Law Changes
Tax laws change frequently, and new deductions, credits, or requirements may affect your situation. Stay informed by checking the IRS website and following tax news. Or, even easier, let our team worry about keeping up with changes and ensuring your tax returns are optimized to take advantage of every available benefit.
10. Don’t Procrastinate!
Filing taxes as a freelancer requires more effort than being on someone else’s payroll and simply submitting a W-2. Start early, keep good records, and plan ahead to avoid last-minute stress and potential penalties.
By staying organized and informed, freelancers and gig workers can successfully manage their taxes, maximize deductions, and keep more of their hard-earned money. Whether you’re new to self-employment or a seasoned freelancer, these tax strategies will help you stay compliant and financially secure year-round.
