Going Freelance in 2024? 5 Essential Tax Moves to Make
There are benefits to being freelance from a tax perspective, but also challenges. Read on to see how to proceed once you make the decision to go freelance.
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Going freelance is a decision that could greatly improve your quality of life. As a freelancer, you'll generally be able to set your own schedule and enjoy more flexibility. You might even see your income rise, too.
But if you're going freelance this year, there are some important tax moves you'll need to make. Here are five to tackle.
1. Find a great accountant
Going freelance could open the door to some great tax benefits -- but also some complications. For example, you're required to pay into Social Security and Medicare via self-employment tax, which is a tab salaried workers split with their employers. But when you're self-employed, you have to cover that entire expense yourself.
That's why it's so important to get yourself a good accountant. That way, you'll have someone who can guide you through the nuances of being freelance and help you maximize any benefits you're entitled to.
2. Set money aside for estimated quarterly tax payments
When you're a salaried employee, you have taxes taken out of your paychecks regularly. But if you're self-employed, the income you receive isn't taxed. So it's on you to pay the IRS a portion of it on a quarterly basis.
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An accountant can help you calculate what your estimated quarterly payments will amount to. But one thing you should do independently is set money aside to cover those bills. So for example, for every $100 you earn, you may need to put $25 or $30 aside for tax purposes. Your accountant can help you come up with a good percentage.
3. Figure out a way to keep tabs on your business-related spending
One benefit of being self-employed is getting to deduct expenses you incur in the course of doing business. If you buy a laptop to do work on, that generally counts as a deductible expense. Similarly, if you pay for recurring services that are needed to do your job, like an internet connection, those are generally deductible.
It's important to come up with a good system that allows you to track your freelance spending and, just as importantly, keep it separate from your personal spending. One thing you may want to do is designate one credit card of yours for work-related spending only. That could make it easier to avoid confusion.
4. Find the right retirement plan to save in
When you're self-employed, your options for saving for retirement in a tax-advantaged fashion extend well beyond traditional and Roth IRAs. A SEP IRA, for example, could make it possible to set aside more pre-tax income for retirement. So could a SIMPLE IRA or a Solo 401(k).
It's really a good idea to ask an accountant which retirement plan is right for you. With some retirement plans, the amount you're allowed to contribute is calculated as a percentage of your income. So an accountant can help you figure out which plan is best based on that and other factors.
5. Figure out if it pays to start a business
There can be certain benefits to starting a small business rather than simply being a self-employed individual. In some cases, starting a business could leave you paying less self-employment tax on your earnings. For example, with an S-Corp, you pay yourself a salary that's subject to self-employment taxes, but your general business profits (which are yours to take) aren't subject to those same taxes.
Setting up a business can be complicated, and there can be costs and drawbacks involved. So while it's good to do your research, this really isn't the sort of thing you want to do alone. Instead, have an accountant sit down with you to walk you through your options and advise on which setup is right for you.
Going freelance can be an exciting career move. Tackle these important tasks to start off on the right foot.
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