Common Mistakes Freelancers Make When Filing Taxes & How to Avoid Them

Freelancing offers unparalleled freedom and flexibility but also comes with unique challenges, particularly when managing taxes. Many freelancers stumble through tax season due to a lack of preparation or thorough understanding of the tax system. 

This article explores some of the most common mistakes freelancers make when filing taxes and provides practical advice on preventing these pitfalls in the future.

Why Proper Tax Filing Matters

Unlike traditional employees, freelancers don’t have taxes automatically withheld from their income. This necessitates a better understanding of tax obligations, including income tax, self-employment tax, and possible state and local taxes. Accurate tax filing not only ensures that freelancers maximize their deductions and benefits, but also empowers them to take control of their financial health.

What You Should Watch Out For

Mistake #1: Neglecting to Track Income and Expenses

Many people will often forget to monitor their income and expenses regularly. As a freelancer, having no accurate records of your expenditures makes it nearly impossible to file accurate tax returns. This oversight can result in underreporting income, which may trigger an IRS audit, or overreporting income, leading to higher tax liabilities.

Implement a system for tracking your finances from day one. Record every transaction using accounting software like QuickBooks, FreshBooks, or a simple spreadsheet. Also, make it a habit to update this information regularly, ideally weekly, to avoid a backlog. 

Mistake #2: Not Making Estimated Tax Payments

Freelancers are required to pay estimated taxes quarterly if they expect to owe $1,000 or more in taxes for the year. Missing these payments can result in penalties and interest charges. 

To avoid this mistake, mark your calendar with the due dates for estimated tax payments: 

• April 15
• June 15
• September 15
• January 15 of the following year 

Calculate your estimated taxes using IRS Form 1040-ES and pay on time. 

Mistake #3: Failing to Set Aside Money for Taxes

As mentioned earlier, freelancers do not have taxes automatically deducted from their paychecks. This means you are responsible for setting aside a portion of your income to cover your tax liabilities. A general rule of thumb is to set aside 25-30% of your income for taxes. 

Consider opening a separate savings account dedicated to tax savings and transfer the appropriate percentage of your earnings into this account regularly. By doing so, you have funds available when it’s time to pay estimated quarterly taxes and your annual tax bill.

Mistake #4: Overlooking Deductions

Did you know that various business-related expenses, such as office supplies, software subscriptions, travel, and home office costs, can be deducted by a freelancer? However, many fail to take full advantage of these deductions due to a lack of knowledge or fear of an audit.

As such, it pays to educate yourself on what expenses are deductible. For more information, refer to IRS Publication 535, Business Expenses, or this article. 

Mistake #5: Incorrectly Calculating the Home Office Deduction

The home office deduction is one of the most beneficial but misunderstood tax benefits available to freelancers. Miscalculating this deduction can lead to errors on your tax return. Your workspace must be used exclusively and regularly for business to qualify for these deductions. 

There are two methods to calculate this deduction: the simplified and regular methods. The former allows a deduction of $5 per square foot of home used for business, up to 300 square feet. Meanwhile, the latter requires you to calculate the percentage of your home used for business and apply this percentage to your total home expenses.

Mistake #6: Filing Late or Not at All

Timeliness is a must in tax filing. Procrastination can lead to errors due to last-minute rushes. In severe cases, failure to file may trigger audits and legal action from the IRS.

To avoid late filing:

• Know Your Forms: Familiarize yourself with the forms used for filing taxes.
• Set Reminders: Use calendar reminders for tax deadlines.
• Prepare Early: Start preparing your tax documents before the deadline.
• File For Extensions: If you can’t meet deadlines, file for an extension with Form 4868.

Mistake #7: Misunderstanding the Self-Employment Tax

Apart from income tax, freelancers need to pay self-employment tax, which covers Social Security and Medicare contributions and can be a significant portion of your total tax bill.

The current self-employment tax rate is 15.3%, which includes 12.4% for Social Security and 2.9% for Medicare. Bear in mind that half of the self-employment tax is deductible on your income tax return, which can reduce your taxable income.

Mistake #8: Misclassifying Workers

If you hire help, it is imperative to classify workers as independent contractors or employees correctly. In most cases, the person is likely an employee if you control what work is done and how it is done. If workers control how the work is completed, they are likely independent contractors. Either way, use IRS Form SS-8 to request a determination of a worker’s status.

Mistake #9: Not Seeking Professional Help

While it might seem cost-effective to handle taxes independently, the complexity of tax laws can make it beneficial to seek professional assistance. Maintain clear and consistent communication with them. Also, provide them with all necessary documentation and updates on your situation.

If hiring a professional is not feasible, invest in reputable tax preparation software (as mentioned above) to guide you through the process and help ensure accuracy.

The Bottomline 

Doing taxes as a freelancer is easier said than done. Fortunately, this can be manageable by identifying common tax mistakes and implementing strategies to avoid them. When in doubt, consider consulting a tax expert to ensure you’re on the right track. Taking these proactive steps can ensure compliance and reduce financial stress.

At NCH, we provide the expertise and support business owners need to fulfill their tax obligations. From identifying deductible expenses to better understanding our country’s ever-changing tax laws, our team will support you every step of the way.

Call 1-800-508-1729 or visit our website to schedule your complimentary consultation!

DISCLAIMER: The above material has been prepared for informational purposes only, containing opinions of the provider and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. Please consider consulting tax, legal, and accounting advisors before engaging in any transaction.