Freelancing comes with many benefits, but it can present a lot of challenges during tax time. As with any other business, freelancing is subject to taxation by the federal government. Failure to file your taxes on time or underpaying your taxes can result in fines and penalties. So how do you prepare for the tax period and avoid the challenges associated with it? Below are some crucial tips for your freelance business.
Define Your Business Structure
Your business structure defines your tax obligations. Most freelance businesses fall into one of the following categories:
The business you run determines how you pay your taxes. For example, sole proprietors are one with their firm. Thus, the business is considered a pass-through entity where the taxes are passed through to the owner. Many freelancers file their taxes as sole proprietors.
If you've registered your freelance business as an LLC, you have to separate business and personal taxes. Filing taxes for a company is also a little more complicated as compared to a sole proprietorship. Thus, define your business structure and understand local and state laws regarding taxation.
Keep Proper Records
The key to proper tax preparation is keeping track of your expenses. If you lose some receipts, you might underpay your taxes, which may attract fines and penalties. Below are some steps you can take to ensure proper record keeping:
Take advantage of budgeting apps for proper record keeping. Choose debit card and credit card payments over cash payments as the latter are hard to track and reconcile. Don't rely on your monthly credit and debit card statements, as these don't provide a full picture of your expenditures.
Maximize Tax Returns
Freelancers can lower their tax burden by taking advantage of tax returns. For example, if you work from home, you can deduct your home office rent and expenses against your taxable income. You can also deduct a portion of your internet and phone expenses against your business' tax returns. Other deductions you can take advantage of are:
However, some of these deductions require extensive evidence and documentation. For example, for you to claim home office expenses, you need a dedicated home office. Thus, take pictures and keep receipts that will support your deductions.
Filing taxes for a freelance business can be an uphill tax. Thus, if this process gets too complicated, consult a tax preparation service.Share