I’m coming up on my 8th year being a freelancer this year. It’s been fun at times and crazy at other times, but I’m truly grateful for everything I’ve been able to do and accomplish through freelancing. While earning extra money through freelance work is nice, it’s also important to understand your tax implications. I’ve learned from my tax mistakes and want you to as well.
I love earning a flexible income and know many other people enjoy this as well. With inflation and so many other economical issues, more and more people are looking to side hustles and flexible streams of income.
If you earn more than $400 per year in freelance income, you’ll need to claim that income on your taxes.
Setting Aside Money For Taxes is Crucial
When I started freelancing, I was lucky enough to know other bloggers and freelancers who were already finding success. One of the main things they emphasized was to save a portion of your freelance income for taxes.
In 2015, I didn’t know how much I’d earn or if I’d even be successful. But I ended up earning around $9,000 that year in freelance income alone. I’m so grateful that I took this advice and set aside around 25% of my income for taxes.
However, there will still be several tax mistakes I made early on as a freelancer. Here are 4 mistakes to avoid at all costs.
1. Not Opening a Business Bank Account
Initially, I was so excited to start making money through freelancing that I didn’t even think about opening a separate bank account. I just sent invoices on PayPal or accepted deposits into my personal bank account. The idea of opening a business bank account never occurred to me. As far as I was concerned, I didn’t have a business. I was just hustling to pay off my debt.
When it came time to file taxes, my finances were a mess. It took a long time sort through my income to separate freelance payments from my W-2 income. I had a hard time remembering what certain payments were along with professional expenses like coaching, running my blog, etc.
Opening a business bank account is crucial because it makes it so much easier to track your freelance income AND expenses. When you file taxes, you need to submit a profit-loss statement and the process is much smoother when you separate your finances.
I understand that getting a business bank account can seem like a big deal. Some business checking accounts have strict requirements that you may not be able to meet. Keep in mind that just opening a separate bank account (designated for business finances) can suffice as well. The key is just to keep everything separate to avoid costly tax mistakes.
2. Missing the Quarterly Tax Deadline
Before freelancing, I had always just filed my taxes once annually before April 15th. However, freelancers should pay quarterly estimates throughout the year. As a freelancer or gig worker, taxes aren’t being withheld and you’re responsible for paying them.
At first, I understood this part and just thought I’d set aside of percentage of my freelance income each month. Then, I’d pay my taxes in a lump sum in the spring.
Here’s the thing. Freelancers who don’t pay quarterly estimates could be subject to a penalty fee from the IRS. When I got together with my accountant to file in 2016 AND 2017, I had to pay the penalty fee.
Yes, I made this mistake twice. The next year, I got more serious about meeting my quarterly estimated dates and asked my accountant to remind me.
For reference, the quarterly estimated tax payments deadlines for freelancers in 2023 are:
- April 15th (For Q1 income)
- June 15th (For Q2 income)
- September 15th (For Q3 income)
- January 15th the following year (For Q4 income)
Learn more about paying quarterly estimated taxes here.
3. Not Tracking Expenses as Carefully Each Month
Not tracking business expenses carefully is one of the most common tax mistakes freelancers make. Freelancers are independent contractors and can, therefore, write certain expenses off when they file taxes. However, if you don’t track your expenses well enough, you won’t know what to deduct.
I realized I could claim costs for things like:
- My cell phone bills (when used to conduct business calls)
- Food and travel expenses for professional conferences
- Fees to host my blog
- What I spent on courses and training
- Contractors and virtual assistants I paid to help with my freelancing business
Filing taxes after year 1 and year 2 of freelancing was brutal because I didn’t really have a system to track these things. Instead, I’d be overwhelmed with reviewing past bank transactions for the past 12 months each spring. Not fun.
To fix this, I started using a bookkeeping software through GoDaddy. It was only $10 per month and automatically tracked my business transactions so I could categorize them. Unfortunately, GoDaddy booking is no longer in service and I’m thinking of switching to something else like Quickbooks.
Regardless, investing in a tool to help you track and categorize business transactions can be a lifesaver. You can easily download the reports from the software to ensure you can claim all qualifying expenses on your taxes.
4. Failing to Match My Income Records with My 1099s
If I earned a certain amount of income with a freelance client for the year, they would often send me a 1099 form. One time, I remember a freelancer friend of mine telling me how she was horrified that a client put the wrong amount on her 1099. Apparently, she had kept her own meticulous records of how much she earned with that client. What was shown on the 1099 was very off.
I remember thinking about how I had failed to even check my 1099s to compare it with my records. This could create problems in the future if a client reported something to the IRS and I reported something else.
From then on, I made it a habit to cross-check these tax documents and make sure clients know if the numbers were severely off. Clients are humans too and can easily make mistakes.
Summary: Avoid These Freelance Tax Mistakes Early On
I made quite a few tax mistakes early on my in freelancing career. However, there are still some things I got right including hiring a CPA who has experience working with freelancers early on. There is so much to learn when you freelance and it takes time.
But, if you can learn from others what no to do in certain areas, you’ll save yourself a lot of time, effort, and money.