Tax advice from a 13-year freelancer

If you’re one of the 57 million people – or 35% of the U.S. workforce who freelances, you enjoy a lot of freedom. You get perks like:  

• a flexible schedule
• picking and choosing which projects you work on
• higher pay

And of course, there’s the not so fun parts of freelancing… like paying taxes.

Today I want to share a few tips and strategies that you can use to prepare to file taxes without getting stressed out.

But before I jump into the details, let's set something straight...

Taxes are a necessary evil

The ability to brand yourself is one of the upsides to freelancing.

Maybe you refer to yourself as a designer, photographer, or writer. 

Or maybe you have a creative title like “marketing ninja” (I really hope not. People who call themselves ninjas when they don’t know ninjutsu or have an actual sword really grind my gears but anyway…).

From a tax perspective, the Internal Revenue Service (IRS) doesn’t care what you call yourself -- freelancer, self-employed, independent contractor -- because in their eyes, you’re still a business (self-employment is a tax status, freelance is the way you perform your work).

And that means you’re responsible for the Social Security and Medicare taxes your employer used to handle… the full 15.3% tax.

It’s like Michael Bloomberg said, “Taxes are not good things, but if you want services, somebody's got to pay for them so they're a necessary evil.”

As freelancers, we can’t depend on an employer to make deductions from our income on our behalf. Self-employed people are responsible for staying on top of their own tax obligations and figuring out what they owe and when they need to pay.

Plus, when you freelance, tax time isn't once a year – it's always on the horizon (more on this in a bit).

Our tax obligations as freelancers are more complicated than those of wage-earning employees. 

Pay now, or pay (more) later. Either way, you're gonna pay

If thinking about taxes makes you want to break out in hives, you’re not alone.

Many new freelancers don’t consider taxes (until it’s too late) and most new freelancers undercharge.

If you make either of those mistakes, you will end up paying for them later.

How?

• underpayment penalties
• a big tax bill in April
• IRS penalties and interest piling up

And, of course, that’s only the tip of the iceberg.

If you don’t file your tax returns, the IRS may prepare your return for you. That’s what’s known as a substitute for return. The problem is the IRS will not have your best interest at heart when they prepare the return. For instance, if you’re eligible to deduct business expenses, the IRS will not claim those deductions for you on your substitute return.

The IRS has a whole department called the IRS Small Business/Self-Employed department. This department has the power to enforce return filing, levy your income or assets, or even file a tax lien on your property. And — the IRS can keep taking your earnings until you file your back tax returns and pay the taxes you owe!

If you owe more than $50,000 in back taxes, penalties, and interest, the IRS can get the State Department to revoke your passport.

Finally, if you don’t file returns and pay self-employment tax, your earnings for those years won’t count towards your future Social Security benefits which affects your future income.

Freelancer tax tips from in the trenches 

I'm not an accountant (I don’t even play one on TV) so take my advice with a grain of salt. 

Better yet, consult a qualified professional.

That said, to give you a broader perspective on how working freelancers handle taxes, I reached out to some of my freelance friends to see what they had to say about doing taxes as a freelancer.

Before I share their insights, let me give you my two cents.

• Keeping accurate and detailed records is key. You can use Moxie, for example, to track expenses related to your freelance business. 
• Open separate checking and credit card accounts for your business so you can separate your personal and business finances.
• Take a year-round approach to taxes. Find out when taxes are due, ahead of time and set 20-30% of each paycheck aside.
• Be aware there have been changes to the tax code this year. For example, provisions in the coronavirus relief bill mean you may be eligible to reduce your income by up to $300 for charitable contributions. You can also take a 100% deduction for any meal expenses incurred after December 31, 2020 through December 31, 2022.
• Hire an accountant.

Here’s the reason I say leave tax prep to the professionals: Sure, I could do my own taxes. I can also change my own oil, do my own landscaping, and sew my own clothes. But I don't because there are people who are much better at it than I am. Same with taxes. I feel less stressed when I know a professional filled out all the proper forms correctly and made sure I claimed the right deductions and paid the right amount.

One of the biggest mistakes I see freelancers make is thinking the IRS is your enemy. We've all heard anecdotes about the big bad taxman. The reality is the IRS is just doing their job and can actually be helpful if you play your cards right. After all, what better source for answering any of your tax questions? They even have a free helpline (800-829-1040).

Now, let’s hear from some experienced freelancers about how to make this whole “tax thing” a little less painless.

Kat Boogaard is a Wisconsin-based freelance writer, mainly covering topics related to careers, self-development, and freelancing.

• My favorite tip is to set up a separate savings account for your tax payments. I focus on filling my tax savings account first—before I invest money back in my business, make unnecessary purchases, etc. That way, I know I have what I need already set aside. Plus, putting it in a dedicated bank account (rather than mixing it with my other money) helps me feel like it was never really "my" money to begin with, which makes sending in those large payments every quarter at least a little less painful.
• I suppose the biggest mistake would be forgetting about them! You do need to pay taxes. And, while I know the process can feel sort of intimidating, it's important that you do it. Find an accountant to help you, if you need it!

Jacob McMillen is a copywriter, content strategist, and founder of the Write Minds community

• Track your business revenue and expenses monthly instead of waiting until the end of the year to do it.
• Maximize your tax-advantaged account contributions. IRAs make a lot of sense if you are saving less than $6k per year, but if you want to save more, a lot of freelancers don't realize that they can contribute up to $58k (depending on income) in an individual 401k, and you don't pay taxes on those contributions. I've reduced my tax liability by $7k the last three years by making $30k contributions to my 401k, and while there are some good arguments for that being a suboptimal investing strategy, my goal was simply to get my low-risk retirement account to $100k before hitting 30 years old, so I could take bigger risks moving forward knowing that if everything else blows up in my face, I'm almost guaranteed to have a survivable retirement amount in that account by the time I hit 65. 

Megan Williams is a content strategy consultant who also runs Black Freelance, an online community for Black Freelancers.

• Ok, so the most common "mistake" I see people make is trying to make quarterly taxes work. Most of our financial interactions are set up a lot more frequently, so for most people it's just easier to stack the tax habit on top of other bill-paying tasks. I gave up on quarterly taxes early and just started treating my taxes as a monthly bill, paying my estimated percentage (at the time I was going with around 25%) of my gross and it worked fine. (I talk about it a little here.) The added bonus of the monthly approach is the mental shift — it encourages you to address taxes as a constant reality vs. something you can put off until a couple months down the road or even the end of the year. This means you can start to get a more realistic feel for the income you're bringing in as early as possible.

Samar Owais is an email strategist & conversion copywriter for SaaS and eCommerce businesses.

As someone who started her business in a tax-free country (UAE), I spent 10 years not worrying about taxes. Then I moved to a country where I had to pay taxes for the first time in my life. So here's my advice from deep in "tax newbie" trenches.

• Get a bookkeeper. Not only will they track your money but they'll bug you about tax time too.
• Depending on where you live, set aside at least 30% of your income for taxes. Even if you know nothing about taxes and you're doing your best not to think about it or do anything until the last minute, having money set aside for taxes will save you sticker shock and make filing taxes "feel" easier.
• Hire a tax lawyer BEFORE you need a tax lawyer. As someone who reached the age of 31 before having to file taxes, I can tell you - taxes are scary! But knowing you can foist them off at someone else because you had the presence of mind to hire someone before tax time... BLISS.
• And if you're an international freelancer with an LLC in more than one country... you need a tax lawyer who can either handle both countries or find a new one in each country.

Moxie can help you avoid tax hell

The good news is you don’t have to suffer through tax hell.

There is a lot of advice available if it’s your first time filing taxes as a freelancer.

And there are plenty of tools to help you stay on top of your financial situation… like Moxie.

Not only does Moxie help you keep track of expenses, invoices, and payments, but Moxie also gives you access to trusted expert advisors so, if you need a tax guy or gal, we’ve got you covered.

Freelancers can become unstoppable with a single place to manage their entire freelance business and have the ability to tap into experts and a community of their peers. Join the Moxie community now, and together we can change the future of work.

2021 is the year of the freelancer, and we’re here to make it happen!

Moxie is an all-in-one business management platform created specifically for freelancers who are just getting started or looking to grow their business.

Visit withmoxie.com now to see what we’re all about.