How can I save money on taxes as an independent contractor?
Contracting or freelancing requires you to wear a lot of hats: Relationship building, keeping track of your time, marketing your skills and actually doing the work. But one of your priorities should also be establishing how you handle your money.
You’re probably used to being hit with a large tax bill during tax season. But by doing these three things, you might lower that bill and even out your cash flow.
Understand your deductions
It’s essential to understand what expenses you can and can’t claim as a tax deduction. This means keeping the right receipts and tracking the right expenses. Figuring out what’s what can be a little confusing because what you can deduct can vary between industries and occupations. Talk to a tax advisor from the beginning to help you plan for any bigger work-related purchases that you may need to make.
Get a system sorted
You’ll thank yourself later for setting up a good system now. Getting your expenses recorded and your invoices organized means you’ll be able to spend more time doing the important stuff in your business. It’s not just about saving time — staying on top of your cash means you’re more likely to succeed. Do your research and choose a system that will work for you. Consider choosing a software platform which allows you to record your time spent on projects, which can make sending invoices easier.
Stash that cash
When you’re running your own business or working for yourself, it’s important to always keep your tax obligations in mind. Make sure you have money set aside in a separate account or consider making quarterly estimated tax payments.
One way to budget and keep on top of your business taxes is to pay yourself a wage. Keeping your accounts separate also prevents you from thinking of all your business income as spending cash. Remember to also put aside a little extra to cover your holidays and any quiet periods.
The bottom line
Freelancing and contracting can make your tax situation complicated. You’re usually hit with a huge bill and left to pay it all at once.
By making all the deductions you can, saving throughout the year and paying quarterly estimated taxes, you might be able to save more on your taxes. Consulting a tax advisor can help you create the best tax strategy based on how much you freelance and who you freelance for.