Four Tax Mistakes I Steered Clear of Early in My Freelancing Journey

As I near my eighth year of freelancing, I’m taking some time to think about all the ups and downs I’ve experienced—there have been incredible highs, tough challenges, and really valuable achievements. It’s great to earn extra money through freelancing, but it’s important to stay aware of how it affects your taxes. I’ve made my share of mistakes, and hopefully, you can learn from them.

I truly value the flexibility of freelance income, and I know many others feel the same way. With the current economic hurdles like inflation, more people are looking into side gigs and diverse income sources. Just a heads-up: if you make more than $400 a year from freelancing, you’ll need to report it on your taxes.

It’s crucial to set aside money for taxes. When I first started freelance work, I was lucky to know other successful bloggers and freelancers who emphasized the importance of reserving a portion of your earnings for tax purposes. Back in 2015, even though I was uncertain about how much I’d make, I managed to earn about $9,000 that year from freelancing alone. I’m thankful I took their advice and put aside about 25% of it for taxes.

Despite this, I did make several tax blunders as a beginner freelancer. Here are four mistakes to steer clear of:

1. Not opening a business bank account: When I started to make some real money freelancing, the idea of having a separate bank account for it never crossed my mind. I was more focused on paying off debts with the extra cash. This oversight made it tricky during tax time because my freelance earnings got mixed up with my regular income. Setting up a business bank account can really help keep track of freelance income and expenses, making tax filing much smoother.

2. Missing the quarterly tax deadlines: Before freelancing, I was used to filing taxes once a year by April 15th. But freelancing requires meeting quarterly tax deadlines because taxes aren’t automatically taken out. I initially got penalized for missing these dates. Now, with close coordination with my accountant, I make sure to meet these deadlines to avoid any penalties.

3. Not keeping track of monthly expenses: A common mistake among freelancers is not keeping tabs on business expenses. Keeping records of these expenses is essential because they can be deducted come tax time. I struggled with this during my first two years of freelancing, but using bookkeeping software to organize business transactions has been a huge help.

4. Not double-checking income with 1099 forms: People make mistakes, and that includes your clients. They might report incorrect amounts to the IRS, so it’s essential to compare your 1099 forms with your records to avoid any discrepancies.

In summary, despite making several tax errors early in my freelance career, hiring a CPA who is experienced with freelancers was a lifesaver. Freelancing comes with a learning curve, so take the time to learn and, if possible, learn from others to avoid common pitfalls.