The #1 Tax Mistake Freelancers Make and How to Fix It

Tax mistakes as a freelancer can cut into your revenue and even stunt your business growth. As a self-employed professional, you’ve got to be wary of all the money pitfalls you could encounter as a freelancer.

I’ll be the first to admit that being a freelancer can be highly rewarding with many perks- you set your own rates, give yourself raises as your skills improve, and set your own schedule.

However, don’t forget that with great business opportunity comes great responsibility – especially where it concerns taxes. Don’t make the mistake of only thinking about taxes only when tax season rolls around. Whether you are a freelance writer, photographer, designer, or DJ, the best thing you can do for your business is to be proactive in taking care of your tax liabilities.

Don’t believe me? Let me tell you a story.

Once upon a time, when I was still a newbie freelancer, I made $28,000 in one year with a side hustle. I wisely used this “extra” money to pay off some major debt, with the goal being to create a solid financial foundation.

Life was grand. Until it wasn’t.

It wasn’t long until the IRS found me to settle up. Why? Because I had been failing to pay taxes on my side hustle- especially my payroll taxes.

The fear was real, you guys! As was the stress.

Thankfully, I was able to dig myself out of that situation (to the tune of $400) but the potential for major damage was there. I’m so thankful I was able to avoid it.

The big takeaway from that experience: freelancers need to be knowledgeable about their tax obligations– especially filling and paying quarterly taxes. On the other hand, you should never pay more taxes than you need to, either. In other words, we must be proactive and educated about the tax implications of self-employment. Period.

As freelancers, we can no longer make the mistake of ignoring tax issues that will affect us all at some point in our careers.

Since that fateful year, I have learned how to keep minimize my tax burden yet still be compliant with IRS filing and payment requirements.

Here’s what I recommend freelancers do to stay on top of their taxes each year:

Know Your Filing Status

As a freelancer (not an employee), you should be filing as an independent contractor. This means you may be asked to fill out a W-9 form. You should receive 1099 forms from anyone who paid you at least $600 in a calendar year. You’ll have to report all this income you earn with your business (even if you don’t receive a 1099 form.) You may or may not owe taxes on this money based on how much you earn but you’ll definitely have to report it on your annual tax filing forms. I use QuickBooks to track all of my income. For as little as $15 per month, you can track all your expenses and be ready to file taxes with reports generated by QuickBooks.

File Taxes for Yourself & Your Employees

If you are getting money from clients, you’ll need to report that income to the IRS each and every tax filing season. If you take some of that money to live on, you’ll need to file payroll taxes. For example, if you make $50,000 per year from all your client receipts and end up paying yourself $37,000 of that after paying your business expenses, you’ll need to file and pay quarterly payroll taxes. Again, QuickBooks for the win here. With QuickBooks, I simply enter in all my income receipts, how much I want to pay myself and QuickBooks does the rest. Filing and payment of all state and local taxes are on them. They even deduct your tax payment from your bank account!

It’s truly set it and forget it.

Note, if your contracted help is really an employee of your business per IRS standards, you’ll have to pay them like an employee. This means you’ll have a higher payroll burden to cover Medicare taxes, Social Security taxes, and any applicable state/federal taxes for them. This is all done through payroll taxes, which again, I use QuickBooks for.

Having employees also means you are responsible for filing their W-2s with the Social Security Administration as well as for sending each employee a W-2 by January 31^st of each year so they can file their income taxes. (Ummm…QuickBooks does all this for me!)

Independent Contractors

Remember, if you control what the people on your team do, but they have the freedom to figure out how to do it, when they want to work, and where they want to work, they are considered independent contractors. Independent contractors need to fill out a W-9 form that includes his/her name and taxpayer identification number.

You do not need to worry about withholding taxes for contractors – that is their responsibility. However, if you pay an individual contractor $600 or more within a calendar year, you must send them a 1099-Misc form by January 31^st so they can file their income taxes.

This is another task that I give to QuickBooks. They make it pretty easy to get this done because you are tracking all these payments in the app throughout the year.

Automate Your Accounting

Taxes can be complex. In fact, keeping track of your income and expenses can be difficult as well. That’s why I encourage all freelancers to automate these processes by using services like QuickBooks to track expenses through the year or TurboTax to file business and personal taxes. With QuickBooks, I can tax care of all my tax needs and the needs of those who work for me: 1099, W-2 or whatever form I need for myself or my employees/contractors.

Quickbooks is the #1 small business accounting software. In the past QuickBooks has been more costly than its competitors but they recently debuted with packages starting as low as $15 per month.

You can do so much with Quickbooks. You can track ALL of your income and expenses (you can even scan in receipts and track gas mileage). It helps you figure out how to maximize your deductions. You can track time (for yourself or people on your team), send estimates and invoices, manage bills, track inventory and sales, and get some in-depth reports to show you how your business is doing. You can even handle payroll and file your taxes (without having to fill out additional paperwork).

Also made by Intuit is Turbotax, the #1 best-selling tax preparation software for filing taxes online. If you are looking for a simple (yet reliable) way to file taxes each year, I highly recommend this. You don’t have to be a tax professional because it is very user-friendly. They provide 24/7 online support and work smart to get you your biggest refund. You can even start the process for free! Filing taxes can be really stressful and this makes it almost enjoyable.

If you are looking for a simple (yet reliable) way to file taxes each year, I highly recommend this. (You don’t have to be a tax professional because it is very user-friendly.) Intuit (the parent comapny of Quickbooks and Turbotax) provides 24/7 online support with certified accounting professionals and work smart to get you your biggest refund.

You can even start your tax filing the process for free with TurboTax. (Note: if you have a corporate entity, you will have to use TurboTax Business. If you are not a corporate entity, you’ll use TurboTax Self-Employed.

Filing taxes can be really stressful but having apps like Quickbooks and Turbotax makes it simple to deal with.

Now that you’re armed with this info, it’s time to take some action to become tax-compliant. I don’t want you to ever go through what I went through with the IRS. Avoid the stress by checking out Quickbooks for all of your accounting and payroll tax needs as well as look into TurboTax for March 15 business filing. Your business will thank you.

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