5 Essential Tax Tips for Freelancers & Contractors
Starting a business is like starting a new adventure, but the confusing world of business tax can get in the way of the thrill. Follow these tips to simplify the business tax process and discover tax savings along the way.
For many new freelance business owners, striking out on your own can feel like the start of an exciting adventure. But just like all of those 80’s Indiana Jones flicks, there’s bound to be a few intimidating boulders along the way. Like business tax.
Many freelancers and contractors liken business tax to being about as pleasurable as a root canal, but staying on top of your taxes doesn’t have to be a painful process. In fact, getting a better understanding of your tax obligations can lead to major tax savings down the line.
Here at ComplYant, we’re all about making complex business tax simple. With these 5 essential tax tips for freelancers, we’re helping you conquer the world of business tax — no fedora required.
#1 Choose the right business entity structure
Many freelance contractors fail to understand how to choose a business entity, or simply select an entity they are most familiar with, such as the LLC. Yet, choosing an entity type for your business is one of the most important steps you will take as an owner. Selecting the right business entity determines how you are taxed, the liability you have to those with whom you do business, your prospects for obtaining a business loan, or raising money from potential investors.
A business entity is simply how an organization is formed to be taxed. In addition to the reasons listed above, the purpose of selecting a business entity structure also determines the most favorable tax treatment for your business. Selecting an entity type informs your state, and the IRS, how your business should be taxed and directs what type of income tax return form you will have to file at tax time.
There are four main entity types:
- Sole Proprietorships
- Limited Liability Company (LLC)
For example, a single-member LLC is taxed in the same manner as a sole proprietor — meaning both only need to file a single tax return — unless they elect to be taxed as an S-Corp (a legal structure in which the business owners are taxed separately from the business), or a C-Corp. Still, these are all unique entity types and are taxed differently, so it's important for freelance business owners to select a tax structure that best benefits their business.
#2 Review your industry’s tax breaks and incentives
Along with selecting your entity structure, it is crucial to know what industry your freelance business operates in. That’s because some tax write-offs or incentives are only relevant for specific industry types. For example, a startup in the agricultural space might receive a tax credit because it’s creating new jobs in the region, or a technology company might receive a break because it’s attracting new industry to the state.
#3 Keep your books in order
For many freelance business owners, managing business finances can seem like a daunting endeavor. With today’s range of tax & accounting tools, however, it’s become a lot easier to view your spending categories and keep track of tax write-offs and deductions.
Besides using your bookkeeping to manage your company’s day-to-day transactions, you’ll want to use your accounting system to accurately categorize business transactions, track invoices and expenses, and pay your business tax bills on time. Small business accounting data can also provide key insights into your company’s performance, helping you to determine where to expand services, or maybe where more investment is needed.
A few popular accounting programs you can use to manage business income, expenses, and equity include Quickbooks or Zoho Books, etc. You should not rely on your point of sale program or website platform (including Square, Shopify, Venmo, CashApp, etc.) as your primary source for accounting information as these are not set up to be accounting programs and will not provide all of the structure and information you’ll need.
#4 Separate business banking from your personal account
Simply put, income from your freelance business should be held in a bank account separate from your personal checking or savings. This allows you to track tax write-offs and increase your accounting accuracy, as all transactions into and out of the account will be dedicated to your business.
When you connect your business bank account to your accounting system, you won’t have to worry about your personal transactions getting pulled into your business itemizations, and vice versa. Setting up a business account is an easy way to remove the guesswork out of your business finances.
#5 Get your sales tax license
If you’re a freelance business owner who buys items in bulk, registering for a sales tax license can provide a path to even more tax write-offs. Most states require business owners to collect sales tax from their customers on taxable transactions. A sales tax license is required for business owners to collect these fees on the state’s behalf. (In some cases, you may have to apply for a sales tax license in multiple states, also known as a sales tax nexus.)
After you have completed an application for your sales tax license and received approval, you can then write-off the cost of obtaining the license, and/or any expenses associated with the licensing processing, such as payments to your accountant.
Perhaps, the biggest bang for your buck with a sales tax certificate is that it comes with the ability to qualify for a reseller’s permit, which allows businesses to be tax exempt from sales tax for certain purchases when the intent is to resell the items. Instead, these taxes are passed on to the customer. The result is huge tax savings for your business.
Put the kibosh on complex business tax
Another way to ignite tax savings in your business? Keep up with your business taxes. Every year, freelance business owners pay millions of dollars in tax penalties and fines due to accounting errors and missed tax payments. ComplYant’s suite of intuitive tax tools can help you keep all of your deadlines on the calendar — and help you save for future tax bills — so all of your tax advantages come right back to you.