Freelancing: the life of setting your own hours, being your own boss and carving out a career that suits your needs. This independence can be incredibly rewarding, but that doesn’t mean it doesn’t come with its own challenges – and one of those can be tax planning.
As a freelancer, you’re responsible for estimating and paying your taxes instead of an employer working it out for you. But it doesn’t have to be a cumbersome task. The secret? Year-round tax planning.
We’re running through the reasons why this method is the best way to handle stress around tax season, as well as the different ways you can help your future self by implementing year-round tax planning.
Let’s dive in.
Why tax planning makes sense for freelancers
Freelancing is essentially running your own business – and with that comes certain responsibilities, like tax planning. There are several benefits to a year-round strategy; here are some reasons why you should consider tax planning to make your life easier.
Fluctuating income streams
Being your own boss means generating your own work – and with every business, it’s natural for there to be peaks and troughs. This irregularity in your income means it’s difficult to predict annual earnings.
By planning and regularly monitoring your taxes throughout the year, you can better understand your potential tax liability and avoid any nasty surprises when tax season arrives.
The IRS requires freelancers to pay estimated taxes quarterly. Because of this, it’s important to stay on top of your incomings and outgoings to ensure you’re not overpaying or underpaying.
Year-round planning will help you stay on track with making the estimated payments to avoid any fees or penalties from late payments or not paying enough tax. A dedicated tax specialist can also be a good resource for making sure you’re always up to date.
As a self-employed freelancer, there are many different deductions you can take advantage of to reduce your overall tax liability. Some examples include home office costs, IT equipment and travel expenses.
On the flip side, keeping track of every receipt and invoice can be a pain to ensure you’re making the most of these deductions. Breaking up the process into smaller chunks with year-round tax planning makes the process much more manageable.
Freelancers need to be proactive about retirement savings, as they don’t have access to employer-sponsored retirement plans. To top it off, there are different retirement account options to maximize contributions to – and the whole process can quickly get confusing if you don’t keep on top of things.
Year-round tax planning is therefore a great way to ensure you’re making the most of every retirement plan you contribute to, reducing your tax liability at the same time. It’s a win-win!
How to implement tax planning
If you’re sold on the benefits of a year-round tax planning strategy, here are some ways to get the most of of the process.
Keep detailed records of your income from all sources throughout the year and ensure you hold onto every receipt. This will make it easier to calculate your estimated quarterly taxes and file your annual tax return.
You can keep track of these incomings and outgoings in several ways – some freelancers favor a spreadsheet, while others prefer to use accounting software. However you go about it, the main focus is keeping accurate records to make your life easier.
On that note, accounting software has progressed over the last few years to become a favoured option by freelancers and accountants alike. Services like QuickBooks and Xero are two popular examples of accounting software that help you estimate taxes, track expenses and reconcile balance sheets.
If you decide to hire an accountant to help with your taxes, they can even directly access your account (with permission) which further streamlines the process on both sides.
Stay informed about tax law changes
Tax laws and regulations can change yearly, leaving you open to being caught out by a new rule or tax threshold you weren’t aware of. Awareness of significant changes can help you update your year-round strategy accordingly.
Following reliable news sources and attending webinars will help to keep you on top of any changes in the regime. Hiring an accountant can also minimize this issue, as they will keep you informed of any changes to the tax regime that might affect you.
Contribute to a retirement plan
Maximizing your retirement contributions can help you save on tax, as the contributions are counted as deductions. It’s therefore an important aspect of a year-round tax planning strategy.
The three most common retirement plans for freelancers are SEP IRAs, SIMPLE IRAs and Solo 401(k)s. Evaluate your financial goals, income, and retirement needs to determine which retirement plan best fits your situation. From there you can set up regular contributions to look after your future and reduce the overall amount of tax you need to pay each year.
Consult with a professional
If you’re new to the world of freelancing or a seasoned pro, taxes can be the biggest headache of the financial year. If you’re unsure about any aspects of tax planning, you can risk being on the wrong side of the IRS.
Hiring a tax professional can help you navigate the tax laws and develop a strategy tailored to your specific needs. We’re experts in providing tailor-made tax advice if you need a helping hand.
Tax planning isn’t just a once-a-year activity – it’s an ongoing process that requires diligence and attention to detail. By staying proactive and organized with your tax planning, you’ll be well-equipped to navigate the complexities of the tax system and minimize stress.
The right partner can help you to make the most of your tax allowance and take on the hard work so you can focus on the rest of your freelance business. Ahad & Co works with a range of clients to fulfil their tax and accounting needs – get in touch today if you think we’d be a good fit.