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I'm about to do taxes after my first year freelancing. What am I in for?

In 2019, I dabbled in freelancing and made only a couple hundred dollars. The taxes were painful, and factoring in the rest of my household's income, cancelled out all of my hard work. Ouch. This year I worked a little bit harder, but not enough to shift us into a new tax bracket. Will I keep any of my earning this time? What do I need to do this year to make 2021 taxes easier?

  Topic Personal Finance Subtopic
4 Years 1 Answer 1.0k views

Sarah C

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  1. Brian Shelden 238 Community Answer

    If your freelancing is a percentage of your W-2 / employee income, then yes, it's unlikely to cost you lots in taxes.  The best way to minimize your tax burden, whilst self-employed, is to keep good records.

    1. Make sure you get separate bank accounts and a single credit cards for the business.  That way, all your expenses are kept in one place.  Be religious about putting business expenses on your business credit card and business checkbook.  Don't intermingle with personal expenses.  Then you won't forget about them for tax time: they're online and on your monthly statements
    2. Create a separate business savings account just to escrow the business' income taxes.  I like to pay myself first: I put 30% of every revenue check into this account.  As you get larger, you'll need to start making quarterly or monthly estimated tax payments to the IRS.  Better to have that money laying around (and earning interest for yourself, not the IRS), than getting socked with a big bill April 15.  Or worse, a penalty for not having done the quarterlies.
    3. Step 3: set up a service like QuickBooks or Mint to categorize expenses.  That will minimize the data entry at tax time.  

    Note that I'm minimizing the pain of data entry here, not how much tax you have to pay.  Paying a lot of taxes means you made a lot of money.  Be proud!  But also, be prepared.  (See #2.)

    --

    Brian Shelden

    brian@shelden.org

     

    UTC 2021-07-08 07:06 PM 0 Comments

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