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.
When you’re a blogger or online business owner you’re forced to face tax season with a lot more questions than answers.
It’s not fun!
Thankfully though, you can learn a few easy tips for how to prepare your self-employed taxes for less than $100.
In this post you’ll learn how to avoid a large tax bill when you’re self-employed. Plus, you’ll discover a few secret tips that will help you feel more confident about filing your taxes.
1. Set up a separate tax savings account
One of the simplest ways to make sure you have enough money to cover your tax bill is to set up a separate savings account. These can be a the same bank or at different banks.
Although, it’s a good idea to have multiple bank accounts at different banks so you can keep your business and personal transactions separate.
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 just not worth the headache!
Setting up separate accounts and having a different savings account will keep everything organized. You can make it even easier by simply naming the account “Income Taxes”.
As new money comes in for a project or a client you can immediately transfer a percentage of the income into that bank account. Then you can quickly make estimated tax payments directly from that savings account.
Click here to compare the best online savings accounts that are totally free.
2. Automate saving for taxes with an app
Another super simple way to set aside enough money for taxes is by using an app like Digit. Digit is completely free for the first 100 days and it allows you to set up a Rainy Day fund.
Once connected to your bank account, Digit will withdraw very small amounts of money (usually $5 or $10) a few times a week.
You can also make manual transfers via text message to save even more money. An example of this is to calculate 20-30% of your taxes owed on the last client payment you received.
Simply text Digit and ask it to transfer this amount of money from your checking account into your Digit savings account. It’s that simple!
Click here to try the Digit app for free!
3. Don’t skip 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.
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.
4. Keep business expenses organized
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 keep your business expenses organized:
- Use an app like FreshBooks to capture and categorize each receipt
- Sign up for QuickBooks Self-Employed 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 simple but effective methods you can use to keep your finances and books straight for tax season.
Things like computer repairs, office furniture, new equipment (printer, scanner, laptop) and all the office supplies are tax all deductible, and you don’t want to miss important tax savings.
5. 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.
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 self-employed business owners and bloggers to avoid a huge tax bill they’re not supposed to pay.
6. Don’t forget your tax deductions
As an online 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.
I created a FREE Simplified Tax Toolkit just for you. Just opt in using the form 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 self-employed business owner or blogger, 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.