Recently, many people have taken up freelancing. Working on a freelance basis gives the comfort of working from home. The number of freelancers is steadily on the rise across the globe. No wonder that freelancing opportunities are increasing with higher payrolls. Though, the nature of work is flexible for the freelancers, but, it is not very different from working full time. Also, whether it is a 9-5 job or a freelancing stint, paying taxes is one of the most significant aspects of earning a living. However, many freelancers tend to not pay taxes and file returns. It is essential to pay taxes whether you are a working individual or you are self-employed. Here are some tax-related mistakes that freelancers often make. By avoiding these mistakes, you will avoid being hit by penalties by the IRS.
- Failure to pay self-employment tax: This is one of the most common and critical mistakes that freelancers often make. The failure to pay tax may have repercussions in the future. A freelancer has the advantage of receiving their income without any taxes deducted from their salaries. It is essential for freelancers to pay self-employment tax which covers Medicare and Social Security taxes.
- Unorganised finances: Often freelancers make the mistake of using their business income for their personal requirements. Doing this will lead to mismanagement of accounts and there will be confusion in figuring out the expenses for personal use and business use. While filing tax returns, there will be errors in the accounting entries. The best way to avoid such issues is to maintain essential records of the various payments made for different expenses.
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- Incorrect deductions: Some freelancers show incorrect deductions in their account records and sometimes, even miss out some deductions. For instance, when working from home, it is not required to add property taxes. This can save you from higher tax payments. Also, adding irrelevant taxes must be avoided as these may lead to an imposition of penalties if spotted by the IRS.
- Failure to deduct health premium: Many freelancers or self-employed individuals fail to include health insurance premiums in their taxation records. This may deprive the person of availing the various benefits associated with health premium deductions. Also, including health premium in tax records will ensure a reduction in the adjusted gross income, which in turn will make you eligible for tax breaks.
- Numbers are too perfect: When it comes to deductions, the numbers are not always perfectly round figures, instead the numbers are often in decimals. A freelancer who shows neat figures on the records may arouse suspicion. It is suggested to take time and add the actual figures obtained from the receipts.
Being a freelancer and managing income records is a complex task since the payment methods for receiving income is quite diverse. Some are paid on a weekly basis or daily basis and some are given a lump sum for their work. An effective management of income records ensures a smoother tax filing process. This will help freelancers enjoy the benefits of tax breaks. If you are unable to manage your accounts and taxes, it is recommended to seek the help of professionals.
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