A FREELANCER’S GUIDE TO TAXES AND BUSINESS
Working as a freelancer can be advantageous because it allows you to set your own hours, work from wherever you want, and be your own boss. While these benefits entice many people to switch over to freelancing from a conventional job, there are some issues to consider before taking the plunge. Being your own boss involves attention to details, ensuring that you meet deadlines without issue. You will also need to be aware of tax and business responsibilities to ensure that you file your taxes correctly and promptly, adhering to all taxation laws and regulations.
One of the first decisions you will make is about your business entity. This creates the framework with which you will manage and operate your business. The options include a sole proprietorship, a corporation, a subchapter corporation, and a limited liability company. A freelancer lacking skills and knowledge in this area may wish to consult an attorney to ensure that the entity is set up correctly. Another important issue to consider is tax obligations. Knowing about taxes that will be owed is crucial for success. You will also need to know how to track finances and when you will have to pay taxes.
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Managing taxes involves keeping track of business expenses because you can often deduct these expenses from your taxable income to reduce the amount of taxation. Business expenses such as a computer system, Internet service, a printer, ink, office space, and professional memberships can be written off on your income tax return to bring down your total business income. Taking deductions demands careful record-keeping to track these payments. Saving receipts is also important in the event of an audit, which would require you to produce receipts for deductions you took.
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Freelancers must manage many different deadlines. When working directly with clients, the services you provide will usually include specific deadlines by which you will deliver the contracted work. Missing deadlines can have a negative impact on your reputation and your earnings. Filing income tax forms also involves deadlines. Instead of filing by the annual deadline in April as people filing regular personal income taxes must do, you will likely need to file and pay quarterly taxes on your income. Quarterly taxes are due in January, April, June, and September.
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Organization is a top priority for any successful freelancer. Because time is money, you cannot afford to waste time with inconsequential activities such as finding misplaced files. Organization is also crucial for managing your business taxes. Your financial records such as receipts and tax forms must be kept neat and orderly to enable you to access them quickly. While storing hard copies of receipts is one option, many freelancers are embracing digitized options for managing their finances. A number of programs and applications are available, designed to capture receipts and record expenses so you have all the details you need about how and when you spent this money. You will need to have details such as what you bought, when and where you bought it, how much it cost, and the purpose it served for your work. Managing and organizing this information will enable you to provide it to the Internal Revenue Service if requested.
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