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5 Tax Tips for Freelancers and the Self-Employed

Becoming an entrepreneur comes with many benefits, such as choosing work based on your passion, and the joy of bringing something you create to the marketplace. Living here in the Colorado Front Range, it feels like half the population of Fort Collins goes into the mountains every weekend, leaving little true wilderness to seek.  Just when I wonder if there is any adventure left in the world, I realize being a business owner may be the last wild frontier to explore.  When it comes to being safe on your entrepreneurial journey, taking steps to protect yourself from tax perils is one thing you must get correct.  Hopefully, these tips will help guide you on your journey. 

1. Determine if You’re a Freelancer or a Business

First, you need to ask yourself, how much income do you anticipate earning, and will you employ other people than just yourself? If you are a freelancer or plan on making less than $30,000 a year, consider keeping it simple by being a Solopreneur.  This means your enterprise will report expenses on a Schedule C, or if real estate related on a Schedule E, attached to your personal tax return 1040.  This is simpler than filing business returns but often means your deductibility of expenses will be limited, or irrelevant if you take the standard deduction. In 2019 the standard deduction is $12,200 for individuals and $24,400 for married filing jointly. 

If you plan on making more than $30,000, have employees, or enjoy getting greater tax strategy opportunities, consider incorporating your business.   Most companies file as limited liability corporations (LLC) for liability protection.  However, the IRS considers an LLC a legal structure, not a tax entity.  You will either be taxed as a partnership (by default) or you can file form IRC 2553 to be taxed as an S Corporation.  

Professionally, I prefer S Corporations finding there are greater tax strategy opportunities, deductibility of business expenses and reductions to the ‘self-employed’ tax.

If you have a multi-member LLC or a partnership, you will need to file a Form 1065. For LLCs structured as S-corps, a Form 1120S will be needed.  For more in-depth information, visit the page the IRS has a setup devoted to tax information for individuals who are self-employed

2. Keep Your Own Income Records

Don’t make the mistake of earning money and not keeping records.  It is also vital that you keep track of all your income and expenses yourself. Business accounting software or spreadsheets can help you manage these income records. Sometimes information on 1099s can be wrong, and you will not know to ask for corrections unless you have been tracking your income yourself, so it is crucial you keep your own records and then cross-reference your information with that provided to you at year-end.

3. Bank Balance Accounting

One of the biggest mistakes I see business owners make is putting all their money in a single business bank account.  Best practices are to establish at least two other accounts one named ‘Dividend’ and the other ‘Tax’.  From there, every dollar your business makes, a set percentage (5%,10%,15%) gets transferred into the account ‘Dividend’.  This is your bonus reward for taking the risk to start a business.   You can pay yourself Dividends quarterly, and I recommend these funds be used for your family’s enjoyment such as a vacation.  The other account called Tax works very similarly, funded as set percentage of gross revenue (I recommend at least 15%) and covers all your taxes due each month or quarter.  This ensures you aren’t behind at tax time and protects from taxes draining your business capital or profit.

4. Itemize Your Business Expenses

Even if your home is your office, you will be able to write off some business expenses that you use for your freelance work or company. While there are typical deductions such as office supplies, equipment, and computer software, you may also be able to write off an amount of the expenses in your home that are directly used in the operation of your business. This can include expenses such as phone, internet, and a portion of rent or energy bills based on the square footage of the home that is used to operate your business. This not only can save your business money but you personally. 

5. Get Help If You Need It 

Since self-employment and freelancer tax returns can be complicated, it may be best to employ an outside tax specialist to help you file your return. Tax specialists know deductible expenses, the necessary forms you must file, and the IRS and tax regulations that can affect you and your business. While hiring outside help may have an initial expense, it can save you a lot of money and headache in the end.

  1. Irs.gov/businesses/small-businesses-self-employed/self-employed-individuals-tax-center

This content is developed from sources believed to be accurate.   Information provided by Simply Profitable Financial Programs, LLC. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any investment.  Simply Profitable Financial Programs is a cash flow management software that business owners use to easily manage their finances, keep expenses low, and prefund their tax obligations.  Learn more at www.simplypfp.com or by emailing nathan@simplypfp.com

By Nathan Wilson, Certified Tax Specialist ™