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

There are some awesome advantages to being your own boss, but trying to avoid paying a huge self employment 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.  It’s true!

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.

In This Article

How To Avoid Paying A Huge Self Employment Tax Bill

Here is how you as a business owner can plan and prepare for tax season rather than being blindsided:

  1. Set up a separate tax savings account
  2. Automate saving for taxes with an app
  3. Don’t skip quarterly tax payments
  4. Keep business expenses organized
  5. Double-check your tax documents
  6. Don’t forget your tax deductions

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 at 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.

Here’s our list of 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!

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 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. 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 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 self-employment tax deductions — many of which normal employees aren’t eligible for.

So of course you want all the tax deductions you’re due to help reduce your self-employment tax.

From a home office deduction to tracking your mileage, there are countless deductions that you qualify for but may not realize.

Not only will applying one of these tips help you categorize everything properly, but it will also 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!

How Can You Best Avoid Paying a Huge Self Employment Tax Bill?

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.

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