Filing Tips and Errors to Avoid for Self Employed Freelancers for 2023 tax Season
This article offers freelancers tax tips and mistakes to avoid for this year’s 2023 tax filing season. Side hustles, independent contractors, gig work, or working for yourself as a freelancer can be very appealing and have quite a few benefits. So if you chose to skip the typical 9 to 5 job that has a steady W-2 salaried paystub, the IRS considers freelancers to be self-employed, so if you earn income as a freelancer you must file your taxes as a self-employed business owner. A recent Bloomberg article points out that “those who are self-employed face a particularly complicated process because there’s no company payroll department to compile income figures or withhold taxes.” So if you don’t work a typical 9-to-5 job, there are common errors to avoid to escape a potential IRS audit.
According to data from Bloomberg, more than 60 million Americans freelanced last year — about 39% of the workforce, which was up from 36% in 2021 — more people than ever are trying to navigate confusing tax questions. With a lot of the issues to revolve around, having to keep track of your books and records. Think of it as a tradeoff: No employer is keeping track of you, but you have to keep track of all your income, expenses, and profits.
So your first step as a freelancer is to gather and report all sources of your income. If you’re like many freelancers, you have many sources of income.
While you can take additional deductions if you are self-employed, you’ll also face additional taxes in the form of self-employment taxes. Freelancing, gig work, and working for yourself means taking control of your finances, and that includes your taxes.
A recent Turbo Tax article mentions that tracking all of all your income is a little more time involved than if you were a traditional employee, in which case you’d get a single W-2 form for reporting purposes. As a freelancer, you’re likely to get numerous 1099-NEC forms, (1099-MISC in prior years) from each of your clients. If you receive payments through online payment services such as PayPal, you might receive a 1099-K. Payers will also send these forms to the IRS to report their income. In January, I wrote an article about the IRS decision to delay implementing Form 1099-K $600 3rd party payment reporting threshold until 2023.
The Bloomberg article lays out some of the most common mistakes freelancers make when filing taxes and how to avoid them.
Failing to Accurately Track Everything
Having a bookkeeping or accounting system in place such as Quickbooks, Xero and Freshbooks can make the process easier. You can avoid future headaches come tax season when by keeping detailed and organized records of all expenses and profits. By keeping track of all cash going in and out, as well as saving invoices and receipts you will be in a much better place.
Not Separating Business and Personal Accounts
To help with tracking expenses, it is a common best practice to have separate bank accounts and credit cards established for work and for your personal life. To avoid problems with the IRS, keep your business and personal expenses separate. For example, you might run into a gray area if you deduct the entire amount of your cell phone or Internet service while using them only partly for work.
There are a couple of reasons why it’s recommended to have separate accounts:
- If you mix your personal with business, you may overlook possible tax deductions for business costs and end up paying more to IRS than necessary
- Not separating accounts can also lead to incorrect deductions, especially for easily mixed-up costs like travel and meals
Craig Toberman, founder of Toberman Wealth in St. Louis told Bloomberg said he “uses a mileage-tracking USB from TripLog, which plugs into his car and allows him to categorize drives as business or personal.”
Not Taking Advantage of Business Deductions
A big perk of self-employment is being able to subtract business expenses from your tax bill. As a freelancer, you’ll likely have more business expenses than a typical employee, and you can take a number of tax deductions not commonly allowed as a regular employee. But on the flip side, failing to take advantage of deductions and write-offs effectively means paying the government more in taxes than necessary. Chris Russell, the founder of San Diego financial planning firm Tempus Pecunia, mentioned to Bloomberg, Most freelancers figured out how to make money without an employer and don’t truly understand that they are running a business which qualifies for deducting business expenses.”
When you freelance or work for yourself, you supply your own computer, notebooks, and software subscriptions, and have to pay for things like marketing, accounting, and career development yourself. But, on the flip side, all these expenses can be written off come tax time.
The list of possible expense write-offs for freelancers includes every day and often-overlooked items:
- Business-related food
- Travel and lodging
- Utility and office expenses
- Required computer equipment, software or materials
- Cell phone and Internet service
- Courses, conferences and seminars
- Business expenses, like legal, accounting, insurance, licenses and marketing costs.
The IRS requirement for business tax deductions is that expenses must be ordinary and necessary.
Forgetting To Make Quarterly Payments
Freelancers and self-employed individuals are generally required to make quarterly estimated tax payments since they have no employer withholding the taxes for them.
Those who either underestimate the amount of tax or forget to pay could be subject to a penalty.
When you make the quarterly payments, it’s also important to keep those receipts so you have them on hand when filing your annual returns.
Not Putting Money Away Towards Retirement
You may not have an employer-sponsored 401(k) as a freelancer, but you can still save for retirement.
Some tax-advantaged options include a Solo 401(k), traditional IRA, SEP IRA, Simple IRA or Roth IRA. This also helps you save on taxes since you can deduct contributions.
Greg Goff, a financial planner told Bloomberg, “freelancers often overpay in taxes because they didn’t realize they might be eligible to open a retirement plan for their business, which they could make tax-deductible contributions to during the year.”
Taxes are not something you should rush. Start early and take your time because where most people mess up is on the little stuff.
Any discrepancies you have in your 1099 could potentially get you flagged and audited. Some of the most common mistakes that freelancers make when preparing and filing taxes are submitting their 1099s late or with inaccuracies, missing out on credits and deductions, and not having attention to detail. Typos or missing signatures can make a difference, so it can be good to take a step back and review your documents before filing to make sure you didn’t miss anything. If you have any questions feel free to reach out to Huckabee CPA for a free consultation.