Just because you’ve ditched your 9 to 5 job does not mean you can get away with not paying taxes, does it? Believe it or not, in some parts of the world, many freelancers are able to do that, but if you reside in the United States, then you are really better off sticking to the law and keeping your taxes in order.
Sure, it may not be a pleasant thing to monitor and organize your finances so that you can do your civic duty, but it is the right thing to do. In any case, your taxes come back to you in one form and another, and unless your freelancing business is totally over the top, the chances are that you will not have to pay all that much anyway. And, just in case you are struggling with making ends meet – and having to deal with taxes at the same time – there are many resources which can assist you and provide tax relief.
Here are a few tax tips that every freelancer should know about. They will get you a long way.
Pay close attention to the separation of work and personal activities.
This is an absolute necessity if you want your home office to be tax deductible. Anyone can designate a room, or even just a corner in the house, and call it a home office. The trick is to ensure that this area is used solely for your freelancing activities. This cannot be emphasized enough, because the IRS tends to crack down emphatically on home office declarations.
This means that if you use your laptop for personal purposes (on top of work-related activities) and work from the sofa (which also doubles as the TV-watching center), the area will not qualify as a home office.
Deduct health insurance premiums.
Did you know that if you are a self-employed taxpayer, you can deduct 100 percent of your health insurance premiums? Even better, the health insurance premiums for your children and dependents are also covered. If your spouse does not have coverage via their employer, you can deduct his/her health insurance premiums as well.
What you need to take note of: The insurance plan must be taken out for the business.
As a freelancer, you are not sure exactly how much income will come in every month. You may opt to take care of the calculations when tax payments are due, of course, but more often than not, that makes things more difficult. My tip is for you to make estimates for your payments.
While you may not have the exact figure in mind, having a ballpark figure will help you manage your finances better. Another thing I strongly recommend is to put aside money for your taxes monthly. Make this a non-negotiable. At least you will have something set aside for when tax season comes around, and if you set aside more than is necessary, you will have some extra money.
What are your tried and tested tax tips for freelancers?
Image via 401(K) 2012 on Flickr
I like to set aside a percentage of each payment I receive in a separate savings account. I use that money then to pay my quarterly taxes. That way I never have to scramble to find the money to pay my taxes.