5 Tax Mistakes Freelancers Need to Stop Making

tax mistake

Freelancing is a big responsibility and you should be proud to be have taken it. But along with also comes a lot of additional concerns that many freelancers fail to address. One such concern is your future financial security or a retirement plan.  

In a 9 to 5 job, your employer does all the taxation and provides a retirement saving plan like 401 k. As a proactive freelancer, you have to take care of these things all by yourself.  

Here are the 5 mistakes freelancers need to stop making to achieve complete financial stability and flexibility.

1) Mixing your personal and business finances

Most freelancers don’t consider freelancing as a serious business. Hence they fail to correctly regulate their income. They use their business account to buy personal things and vice versa. This can cause a lot of problems when assessing tax at the end of the financial year. In addition, they never come to know about their business expenses. Mixing your personal and business finances is not only a tax mistake but also a poor way to run a business.

2) Not saving for retirement

retirement

Retirement plans and saving money for the future have always been linked with a stable 9 to 5 job. Freelancers don’t consider themselves in this category so they never think about saving money for the future. It is true that freelancing is a small business and not a job. But saving money is one of the very basic financial lessons that everyone show know.

3) Not paying self-employment tax

The employer is supposed to notify the IRS of the amount of tax owed by his/her employees. But since you are self-employed, it is your obligation to report your income to the IRS. And you can do this by paying self-employment tax. Usually, the self-employment-tax consists of Social Security and Medicare. And by making contributions to both you can cut your overall tax. For a freelancer, not paying self-employment tax will result in a hefty penalty and high tax on gross income.

4) Neglecting health care contributions

Health care

You probably would love to know that, as a freelancer or a self-employed person, you are eligible to deduct premiums for health care. That being said, you still have to apply for a healthcare plan and pay the premiums initially. The IRS will adjust the healthcare premiums that you paid by lowering your taxable income. [1]

5) Not having an emergency fund

It’s a great feeling to be self-employed as it provided freedom and endless opportunities, but if the unexpected should happen, who will pay for your expenses? In life, nothing is certain and in crisis situations of need, you will someone to back you up financially. This is where emergency funds come in play. Not having an emergency fund is a huge tax mistake.

Conclusion

Lastly, to help manage your finances, you can use accounting software like QuickBooks Self-Employed. With QuickBooks Self-Employed, you can also collaborate with your accountant or bookkeeper–in case you decide to hire one.    


[1] “Emergency Fund Definition – Investopedia.” Accessed May 29, 2019. https://www.investopedia.com/terms/e/emergency_fund.asp.