For the self-employed, taxes aren’t as simple as going to your local tax depot with your slips and having your taxes filed. As a freelancer, you’re considered self-employed and could experience strict penalties if you fail to report your freelancing income, and pay your taxes. No matter the country that you live in, taxes are essential and a way of life. The government is serious about collecting owed taxes promptly, and failing to do so can cause heightened interest fees, and even charges or jail time.
As an employee, you might not know that the majority of companies pay taxes on a quarterly basis. The reason for doing this is to limit the amount of interest that’s due to the outstanding amount. Interest is a number that can, and does, add up extremely quickly. When you’re an employee, it’s not something that you need to worry about because the payroll department of the company that you work for typically takes care of this.
When you decide to become self-employed, which is essentially what freelancers are, the same rules apply. You should be paying your taxes and reporting your revenue on a quarterly basis to avoid the amount charged in interest. If you wait the full tax year, you’re going to notice that the amount outstanding is more significant, and it’s because of interest. This proves to be a lesson that many freelancers learn in their first year.
Taxes, when you should pay them, what you should claim and more can be found on the Self-Employed section of the IRS website. Outside of that, you could also consult with a CRA who can help to provide you with all the information you need, and even manage your taxes if you see fit.
Monitor Your Records
Record keeping can seem like a tedious task, but when you’re self-employed, it’s crucial. You’re going to want to make sure that the clients you work for are reporting the same amount that gets indicated on your invoices. Failure to keep up with your records could lead to discrepancies, and possibly paying too much, or even too little in taxes.
Invest in Software
Purchasing solid software for your bookkeeping and finances could make the process easier for you. While it’s possible to keep track of your payment records in an excel spreadsheet, or even a receipt book, the margin for human error is larger than it is when you’re using software. There are plenty of penalties for under-paying your taxes, or for filing incorrectly, and as a freelancer, one of your main concerns should be the accuracy of your incoming and outgoing finances.
The pricing for accounting software is steep, but the rewards are there and could save you more than what you’re paying for it by spotting discrepancies. The software is going to cross-check the information that you enter, and when you run through your invoices and tax forms at the end of the quarter, you are going to be more than thankful that you invested. QuickBooks is one of the most popular accounting software and is supported by multiple operating systems.
Keep Up With Reporting
It’s important for you to understand the circumstances in which clients that have hired you on don’t need to produce documents for you, and it can get a bit tricky. Under most circumstances, if you are producing work for a company that’s outside of the country you reside in, they don’t need to provide you with tax forms. For example, if you’re working for a European company, but live in the United States. That company doesn’t file to the IRS; therefore, the responsibility is on you because you still need to report the income to the government.
In another instance, earning less than $600 USD means that the client doesn’t need to produce tax forms for you, but you’re still required to report the income that you earned. Failing to report any amount to the government could result in extreme and costly penalties should you get audited.
Save, Save and Save
Traditional employers do pay for approximately 50% of social security requirements for their employees, and as a freelancer, you’re required to pay the entirety of the bill. Even if you’re great with numbers and have state-of-the-art accounting software, this structure makes it very difficult to come to semi-accurate tax estimations.
Ensuring that you’re prepared for possible adverse situations can save you from having a high bill and a bad headache during tax season. If you’ve not saved enough money and end up owing the government money instead of getting a return, you are going to pay interest fees and penalties for late, or non-payment. In addition to that, you might find yourself in a position where you need to go into unnecessary debt to get your owed taxes paid off.
Tax season isn’t a fun time of year. It’s stressful for those who are doing their taxes, and accountants. Everyone likes the feeling of getting a refund, but that’s not a guarantee when you’re a freelancer. Though the percentage of freelancers in the United States is rising each year, taxes are still get geared towards the more traditional employee. By following along with some simple steps, you can keep yourself from paying penalties, and make sure that you’re staying ahead of the game with your taxes.
What tax suggestions do you have for freelancers? Is there anything from the first time you filed as a freelancer that you would have done differently?