How to Avoid a Huge Tax Bill When You’re Self-Employed

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Want to avoid a huge tax bill when you're self-employed or a freelancer? You’re entitled to a lot of deductions to help reduce your taxes, and I created a FREE guide to self-employed tax deductions!There are some awesome advantages to being your own boss, but trying to avoid a huge tax bill can seem impossible.

Since you’re no longer an employee (that gets the benefit of having an employer pay half your taxes) you’re responsible to pay your own taxes every year.

It’s been a couple years since I quit my job in May 2013 to work on my own business. Like any other freelancer, I’ve had to face tax season as a self-employed taxpayer.

It’s not fun!

Thankfully though, since I was a Tax Specialist from H&R Block I know how to prepare my own taxes for less than $100. Yep! And you can too.

Here’s how to avoid a large tax bill when you’re self-employed. Plus I share a few tried and tested strategies I use that work every tax season.

1. Set up a separate tax savings account

After being self-employed, the simplest thing I found to help pay my large tax bill at the end of the year is to set up a separate savings account. I have multiple bank accounts (at different banks) for business transactions versus personal stuff.

Having one account for everything may seem like it’s easier, but your tax money, business income and expenses, can easily get lost. Plus, it’s not worth the headache — trust me!

Setting up separate accounts and having a different savings account will keep this from happening. I made it even easier by simply naming the account “Income Taxes”.

Every check I get for a project or a client, gets deposited and then I immediately transfer 15-20% of the income I made into that savings account. Then at the end of each quarter, I use GoDaddy Bookkeeping to calculate the tax payment and write a check out of my tax account. 

This is the easy part. The hard part is vowing not touch it until the next tax season rolls around! But if you can stick with it, the next time you have to pay your tax bill, you’ll be glad you put this strategy into practice.

Related: How to choose the best checking account as a freelancer.

2. Make quarterly tax payments

On top of setting aside funds in a separate savings account, it’s extremely important you send in quarterly tax payments too. The IRS requires that “taxes be paid on income as it’s earned”, which basically means they don’t want you to wait to pay your taxes once a year — they want you to pay it 4 times a year.

If you make too much income and don’t pay your quarterly tax payments you will not only get stuck with a large tax bill, but could face additional penalties for not paying the tax as you earned the income.

My estimate was actually very close to what my tax bill was, but since I still had a regular employer last year, I got a small refund. #jumpsforjoy It still hurts to pay in each quarter, but knowing you won’t have a $5,000 tax bill at the end of the year makes up for it.

Related: Here’s a simple and secure guide for paying quarterly taxes online.

estimated tax due dates

3. Organize all your business expenses

As a self-employed freelancer trying to avoid a huge tax bill, the best thing you can to do is keep track of everything you purchased throughout the year. These expenses can go a long way to reducing your taxable income, thus reducing your taxes.

There are several ways you can organize your business expenses:

  • Use an app like FreshBooks to capture and categorize each receipt
  • Sign up for GoDaddy Bookkeeping and update your expenses monthly
  • Hire a bookkeeper to manage your business income and expenses (totally worth it at the end of the year)
  • Invoice all your clients on time and track expenses related to each project

These are all methods I use currently to keep my finances and books straight for tax season. But even then I missed a few important deductions. Things like computer repairs, office furniture, new equipment (printer, scanner, laptop) and all the office supplies are tax deductible.

Thankfully, my accountant helped me remember them, saving me hundreds of tax dollars — which makes the case for hiring a pro versus DIY.

Related: File your own small business taxes with TurboTax Self-Employed.

4. Double check your tax documents

As much as you’d think that a tax document, such as a 1099-MISC or W-2 is accurate, in many cases they’re not. This is why you should ALWAYS double check tax statements that companies or clients send you.

In fact, I recently received a 1099-MISC from a client and immediately noticed it was a bit high for the amount of income I thought I earned with them. I quickly logged into my accounting software and brought up their client file showing the invoices paid.

BOOM. It indeed proved that they added $1,575 too much (likely due to doubling a check amount). If I didn’t verify that my 1099-MISC was correct, I would be paying taxes on $1,575 that I NEVER earned.

This is a simple but easily overlooked way for freelancers to avoid a huge tax bill they don’t have to pay.

5. Don’t forget your tax deductions

As a freelance business owner, you’re entitled to a lot of deductions — many of which normal employees aren’t eligible for. So of course you want to all the tax deductions you’re due (more money in your pocket).

From a home office deduction to tracking your mileage there are countless deductions that you qualify for but may not realize. So I created a FREE guide to self-employed tax deductions just for you. Just click the image below to download the guide for free.

Not only will applying one of these tips help you categorize everything properly, it will be easy for your CPA or Tax Professional to find all the deductions you qualify for. And the more deductions you qualify for, the less tax you’ll have to pay!

As a freelancer, avoiding a large tax bill at the end of the year doesn’t have to be difficult, you just need to apply these smart strategies.

Want some more step-by-step tax help? Check out this awesome book, Independent Contractor, Sole Proprietor, and LLC Taxes: Explained in 100 Pages or Less by Mike Piper.

4 comments

  1. Celise Colston says:

    Carrie,

    I noticed that you’re married. So are you guys filing separately? How does this freelancer filing separate from personal?

    • Carrie says:

      Celise, we file as Married Filing Jointly so it’s together. My freelance income is considered a sole-proprietor so it’s on a Schedule C attached to our 1040 personal tax return.

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