As soon as you start making money as a freelancer, the topic of income taxes becomes crucial. So many of the experienced freelancers we talk to have learned the hard way- thousands due to the IRS, penalties, missed deductions.
In reality, it doesn’t have to be so difficult. Income Taxes for Freelancers is consistently one of our more popular Freelancing Tool Kit talks, and for good reason- the session helps make the topic of income taxes much clearer. We brought Rockstar CPA Martin Kamenski back last Wednesday to share basics of navigating tax law. Here are a few highlights:
- This may seem obvious, but to confirm, if you are making money as a freelancer, you have to pay taxes. Because they are not being taken out of your paycheck, you will need to plan to pay about 20 – 30% of your income (depending on many factors) in taxes.
- Setting up your business will help ensure you get the maximum tax savings without spending too much money on incorporation. Most students and recent grads will start as sole proprietors, but this site (and many others) outline some of the reasons why you might form a business eventually. Your business structure will have a big impact
- Tracking both your income and expenses will help you plan for accurate reporting – which may be done once or several times a year, depending on your business. Martin recommended Xero – an online accounting program- for serious freelancers.
- There are many myths about deductions, but the bottom line is this: you can deduct an expense if it is a necessary cost of doing business. Document everything you spend to justify the costs.
Starting a business- freelance or otherwise – can be overwhelming. The most successful freelancers have a strong team around them. This includes an accountant, lawyer, potentially a banker and definitely mentors in your industry.