The Most Common Freelance Tax Mistakes (and How to Avoid Them)

By Bethany Johnson, Contributor, on March 19, 2018

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Have you ever wished that you could telepathically download all the lessons learned by the many brave freelancers who came before you? When I first started my freelance business, I felt simultaneously overwhelmed by information online and hungry for the wisdom to know exactly which nuggets of that advice I should implement. It’s true: You could spend a year reading about running a freelance business and still not have the most pertinent information you need.

Especially when it comes to finances.

There are many freelance tax mistakes to which a newbie can easily fall victim, and I’m pretty sure I fell for them all. But I’m not alone. Tons of freelancers set up, launch and operate a fledgling business in a way that costs more time and money than necessary — or worse, puts the indy at risk of facing a compliance-related penalty.

You can save yourself the heartache by learning the most commonly made freelance tax mistakes and how to avoid them. To get to the bottom of which financial pitfalls freelancers most regularly fall into (and why), I caught up with Katelyn Magnuson, the Freelance CFO.

Don't repeat the freelance tax mistakes of veteran indys. Katelyn Magnuson, the freelance CFO, lists common financial problems and how you can avoid them.

In your experience, what are the most common tax mistakes freelancers make?

“[Common mistakes include] over-deducting or under-deducting your business expenses, forgetting to track mileage and not keeping sufficient receipt documentation. Also, co-mingling your personal and business finances, and waiting until the end of the year to tally up 12 months-worth of finances.”

Why do you think so many indy workers make these mistakes?

“There’s a lot of misinformation surrounding deductions and finances, especially for entrepreneurs. In this day and age, many finance professionals don’t have experience working with online or non-traditional businesses, and don’t always provide relevant advice for digital businesses. Finances can be confusing, difficult and stressful, and so many solopreneurs don’t want to deal with their finances unless they’re making sure they have the money to keep their business afloat and pay their bills. In reality, this can end up costing them thousands in missed tax savings.”

What should freelancers do to avoid common tax mistakes?

“I suggest they work with an accounting software like Xero or Wave apps, keep a dedicated checking account for their business, avoid co-mingling work and personal expenses in the same account and keep track of any receipts over $75. Many solopreneurs don’t work with a finance professional because they’re worried about the expense, but many freelancers save four times (or more) what they pay an expert for just an hour of consulting.”

Lessons Learned

Take a tip from Katelyn: When you first start out, make sure your finances are in order and that you’re set up to establish a compliant operation.

You can avoid the common pitfalls outlined above by doing the following:

  • Consult with a finance professional to learn more about which business expenses are deductible (and which aren’t)

  • Remember to prioritize your receipts for documentation

  • Don’t mix your business expenses with your personal checking account

  • Keep up with the financial administration of your freelance business

And be sure to fill up your freelance toolbox with the assets and resources Katelyn recommends for solopreneurs:

  • An easy-to-use and effective accounting software

  • Separate bank accounts for business and personal use

  • A simple filing system for both your paper and electronic receipts, like Shoeboxed or Smart Receipts

  • A tax assistant app that automates your tax savings and electronic tax payments

  • The contact information of a trusted financial advisor

Once you have the right resources at your disposal, you’ll be on track to financial success. Take it from a few freelance veterans: The sooner you learn how to avoid freelance tax mistakes, the better it’ll be for your business.

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