As the final days of summer fade, and we start wondering whether the pumpkin spice latte is back at Starbucks, freelancers have another important item to add to their to-do list: tax planning.
Tax planning is most effective as a year-round activity, but freelancers, who often spend days juggling multiple projects, chasing clients, and worrying about fluctuating income, should begin to lay the groundwork now.
Why? One reason is that the third quarter wraps up on September 30th, which is also the end of the fiscal year for the federal government and many companies.
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Fall tax planning tips for freelancers
From a tax planning perspective, fall can be a great time to revisit estimated tax payments (for many taxpayers, the next one is due September 15), refine income projections and begin to get financial records organized. Taking these steps now can make for a less stressful year-end accounting process — and a more manageable tax season.
Here are five fall tax planning strategies to get you started.
1. Start preparing for taxes now
Freelancers should start preparing for taxes as soon as possible. Tax planning at any time of year can feel overwhelming, especially when you're managing multiple freelance gigs. So, if you haven’t given your taxes any thought yet, don’t put it off any longer.
The first day of fall is September 23, which means there are less than 20 weeks left in 2023! And with the holiday season fast approaching, waiting until the last minute to review your finances and assess your potential tax liability will only add to your end-of-year workload.
2. Visit the IRS self-employed individuals tax center
The self-employed tax center is the direct IRS resource for understanding freelancer tax obligations, finding a tax professional and answering frequently asked questions.
If you haven’t visited the site, set aside some time to make sure you’re informed on the latest federal tax information from the agency.
3. Calculate estimated tax payments
Estimated taxes are prepayments made throughout the year on income (typically over $1,000) that isn't subject to withholding, such as freelance income. Failing to make estimated tax payments on time or not paying the correct amount can result in penalties.
Your estimated tax payment amount may vary from quarter to quarter. Use your year-to-date income and expenses to recalculate your estimated taxes for the remaining quarters. If you've launched a new service or product generating additional revenue, factor that into your current estimates.
How much should I set aside for taxes as a freelancer? Since most self-employed individuals are required to make estimated tax payments, saving 25-30% of your income for tax purposes is often recommended to cover estimated tax and self-employment tax. Those funds can also provide a “safety net” if you owe additional money when you file.
4. Revisit common freelancer tax deductions
Common tax deductions for self-employed individuals include marketing expenses, software subscriptions and business-related travel. You may also qualify for a home office tax deduction. The IRS has specific rules for claiming this deduction, so make sure you read through the criteria carefully to see if you can deduct home office expenses.
It’s important to keep all receipts to support your expense claims. Failing to do so can result in disallowed deductions and increased tax liability. Take stock of recent expenses now. These can include (but are not limited to) the following:
- Marketing campaigns
- New equipment
- Business-related publications and subscriptions
(Note: If you don’t already, you may want to consider using accounting software (QuickBooks is a common option) or specialized bank accounts (Lili Premium is one example) that assist in creating Form 1040 (Schedule C). These and other tools simplify expense tracking and tax calculations to hopefully save you time and reduce the likelihood of errors.)
5, Schedule a meeting with a tax advisor
Don't procrastinate meeting with a tax advisor, especially if this is your first year freelancing, your freelance income has spiked, or you've bought a house or started a family this year. Those and other pivotal life events often have tax implications, and a professional tax advisor may recommend strategies to save you money.
Also, whether a sole proprietorship, LLC, or corporation, your business structure impacts your tax obligations. Consulting a trusted business advisor or accountant can help ensure your chosen structure aligns with your needs.
Higher freelance earnings can sometimes lead to more complex tax situations due to factors like multiple income streams, investments, and the potential for more deductions and credits. So if you think your freelance income will be significant this year, seeking professional guidance now may help minimize your tax liability later.
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