Tax season can be a source of stress and uncertainty for online freelancers. Unlike traditional employees, they do not have taxes withheld from their earnings. This means that they need to be proactive in managing their tax obligations. To ensure a smooth and trouble-free tax season, freelancers should be aware of the top errors that can lead to tax woes and take preventive measures.
- Neglecting estimated taxes: Freelancers must remember that they do not have taxes withheld from their earnings like traditional employees. To avoid penalties and interest on unpaid taxes, they should diligently pay estimated taxes on a quarterly basis.
- Ignoring deductions: Freelancers are entitled to various deductions. Examples include home office expenses, mileage, equipment and professional development costs. Not capitalizing on these deductions means paying more in taxes than necessary.
- Ignoring state and local taxes: Freelancers should not focus solely on federal taxes. They should consider state and local tax obligations carefully to avoid potential legal issues.
- Overlooking self-employment taxes: As an online freelancer, you are considered self-employed. You must pay self-employment tax. This tax includes both the employer and employee portions of Social Security and Medicare taxes, which can catch some freelancers off guard.
- Late filing and payment: Neglecting to file a tax return or pay taxes can lead to more significant problems than just the initial tax debt. Late filers may be subject to interest, failure-to-pay and failure-to-file penalties. Some might even face criminal investigations.
- Misclassifying workers: The IRS has criteria for selection when hiring freelancers or contractors. If freelancers need to hire additional workforce, they must be aware of these criteria to avoid serious tax implications down the road.
Steer clear from tax debt
Maintaining good accounting practices and complying with tax regulations can prevent tax debt complications. However, some taxpayers might still be unable to pay their tax balance. They may request an extension or settle in installment agreements in such cases. They can also explore offers in compromise deals to manage their tax debt challenges.
To minimize their tax balance, taxpayers must take advantage of all valid deductions the law allows. Overlooking deductions can result in a higher tax bill.
By staying on top of tax payments and maximizing deductions, they can manage their tax obligations and avoid tax debt hassles.