Freelancing and gig work offer a great opportunity to earn money while enjoying flexible working hours and the freedom to choose your projects. However, when it comes to managing taxes, things can get a bit more complicated and overwhelming. Since there is no employer to assist you with the withholdings, you are on your own when it comes to compliance. Taxes may sound overwhelming, but with the right tax-saving strategies, they can become manageable and even a tool to save money. Here are some tips that will help you to take control of your taxes as a freelancer and save more of your income.
1. Create a Tax Fund for Quarterly Payments
Freelancing is not like a conventional employment, where tax is taken from your paycheck regularly. The IRS expects freelancers to make estimated income tax payments throughout the year before it is due. There are penalties for failure to make estimated payments which can reduce your profits.
One of the easiest ways to prepare is to create a tax fund. Always save 25-30% of every payment you receive in a separate account for your taxes. If you have no idea of the amount you need to pay, you can use the IRS Form 1040-ES or consult a tax expert to help you estimate your quarterly taxes well. Implementing this habit not only simplifies the process but is also a smart tax-saving move.
2. Plan for Retirement and Tax-Saving
Unfortunately, retirement planning is one of the things that freelancers often ignore, but it is one of the best ways to reduce your taxes while preparing for your future. Investing in retirement accounts such as a SEP IRA (Simplified Employee Pension) or a Solo 401(k) offers you an opportunity to reduce your taxable income as you save for your retirement.
For instance, when you deposit $10,000 into a SEP IRA, the amount is taken off your gross income, therefore lowering your taxable income. It’s a win-win. You use it for future needs and reduce your current tax burden. Besides, it is an excellent opportunity to build permanent stability in your freelancing career.
3. Bundle Business Purchases Before Year-End
If you know you’ll owe taxes, buy the business items you need before the year ends. This can lower the income you’re taxed on and reduce your tax bill. For instance, if you are likely to purchase a new laptop, acquire software, or acquire new equipment. It is advisable to do so before the end of December in order to be able to deduct it on that same year’s tax. This helps to lower your taxable income while at the same time helping you set aside for future business requirements.
Final Verdict
Proper tax planning is essential and can reduce the tax burden for freelancers and gig workers. With proper planning, consistent financial habits, and strategic tax-saving decisions, you can take charge of your taxes and reduce stress – and it all starts with better bookkeeping. If you need help navigating your freelance finances, MCKI Bookkeeping can simplify the process. We ensure your finances are in order. Contact us today to make tax season easy and stress-free!
