Year-Round Freelance Money Moves to Simplify Tax Season
Dreading April 15? Set yourself up for success throughout the year.
Good Morning!
Before we get started, I just wanted to say I'm truly grateful you're here.
Thank you for reading, sharing, and supporting my work.
This weekend, Finance for Freelancers crossed the 100-subscriber mark.
This is my first newsletter and my first time publicly sharing non-client writing in years.
I had no idea how it would be received, and seeing so many of you show up means the world to me. Thank you for being on this journey with me. ❤️
Today is April 1st, also known as April Fools’ Day. I recently learned this fun fact: In France, April 1 is known as Poisson d’Avril, or ‘April Fish.’ You can read about a few theories of its origin.
Here’s how French kids celebrate the holiday: They cut out and color paper fish, then secretly try to tape them to each other’s backs without being noticed.
Now on to a less fun topic: taxes. For those of us in the U.S., we’re two weeks away from the federal tax filing deadline.
If you don’t get excited at the thought of preparing and filing your taxes, you’re not alone. 🫣
Since we’re nearing the final days of tax prep season, I figured now would be a good time to discuss some strategies that freelancers can use to set themselves up for success well before April of next year.
While it may feel too early to think about next year’s filing season, it’s not. By taking action throughout the year, you can set yourself up for success and ensure that next tax season is a breeze.
As a reminder, I’m not a tax professional, and this is not tax advice. If you have tax-related questions, please reach out to a tax professional for guidance.
Let’s review some year-round money moves that can help simplify tax season.
Keep an accurate record of your earnings
As a freelancer, it’s your responsibility to report all your income. You’re likely juggling multiple clients and projects throughout the year. That means you need to track all those income streams.
It’s in your best interest to document every dollar that you bring in. It’ll be easier to see how your business is doing financially, and it’ll make tax time easier.
As for how you track your freelance earnings, do what works best for you. One way you can do that is with bookkeeping software. QuickBooks and FreshBooks are two examples.
Another option is to use a spreadsheet. The best part about this method? It's completely free. I use a Google Sheets spreadsheet to document my earnings.
Every year, I create a new spreadsheet. Each month gets its own tab, where I track every project, its rate, and my running total for the month.
This approach makes it easy for me to review my finances throughout the year. It also helps to make tax time way less complicated because I’m ready to dive into the numbers.
Track your business expenses
Tax deductions reduce your taxable income, which can result in tax savings. The IRS allows self-employed business owners to deduct business operating costs.
For a business expense to be deductible according to the IRS, it must be both ordinary and necessary.
Some examples may include:
Software subscriptions
Professional organization membership fees
Educational course fees
Domain registration and web hosting expenses
Advertising expenses
It’s important to keep a careful record of your business expenses. Remember that spreadsheet I was talking about earlier?
In each monthly tab, below my earnings, I record my business expenses for that same month. Many of my business expenses are recurring, so they’re relatively easy for me to track.
Having all of this document in my spreadsheet makes it easy to quickly input my yearly business expenses when preparing my tax return in the spring.
I also keep copies of my receipts. I stash electronic receipts in a folder in my email, and I stash paper receipts in a receipts folder, which I keep in my office.
Make quarterly estimated tax payments to avoid penalties
Self-employed workers, including freelancers, are responsible for making quarterly estimated tax payments.
If you underpay or skip your estimated tax payments, the IRS will hit you with an underpayment penalty. That means you’ll be responsible for paying the remaining amount you owe, plus fees.
But you can avoid this by making your payments by the quarterly due dates.
Do you struggle with managing estimated tax payments? Trust me, you’re not alone.
Last week, I shared what I do to simplify things. I’ve been following this approach for many years, and it has reduced my stress.
If you already read my in-depth guide last week, the next tip will be familiar.
Automate your savings
Instead of stressing out about how you’ll be able to afford to make your next estimated tax payment a week before it’s due, you can save up year-round. Automating your savings can be helpful.
Through your bank, you can set up automatic transfers. Once you do this, money will automatically be moved from your checking account to your savings account on a set schedule.
This can be especially helpful for anyone who is forgetful and for those navigating extra busy seasons of life. You won’t have to rely on remembering to manually contribute to your tax savings fund.
When it’s time to make your next quarterly estimated tax payment, just use the funds you have stashed away in your tax savings account.
This strategy has been a total game-changer for me. Every two weeks, money is automatically stashed into a tax savings bucket in my savings account.
I feel more prepared. Plus, I’m earning interest while my money sits in the bank.
Stay up to date on tax changes
Tax laws are ever-changing. It’s in your best interest to stay alert to recent tax changes so you know what to expect and can plan accordingly.
If the thought of this makes you break out in hives, don’t fret, my friend. Many freelancers choose to work with a tax professional. A CPA can file and prepare your taxes and also keep you in the loop about tax law changes.
Set yourself up for success
The takeaway: How you manage your money matters. You may want to consider whether it’s time to make some adjustments so you’re better organized throughout the year. Small habits, built now, can pay off big come tax time.