Freelancing? Here's how to avoid surprise tax bills (2024)

Taxes are complicated for everyone. Especially this year when we are all navigating the new tax law. But if you’re self-employed or have a lucrative side gig and don’t have your employer’s finance or accounting team to manage your withholding for you it can be even more of a headache. If you’re freelancing or doing contract work, there’s more to it than just filing an annual return. In fact, there are steps you have to take throughout the year to prepare for filing season every April.

I learned this the hard way. I made more money freelancing in 2018 than I anticipated, and I assumed (incorrectly) that taxes paid through my full-time employer would cover most of what I owe the IRS. I didn’t know I also needed to make quarterly tax payments, which means I ended up at risk of penalties. And I didn’t keep careful records for expenses I could deduct.

What I wish I would've known ahead of time is that the best way to prepare for and pay your taxes is to take care of your finances all year long, instead of sitting down with a massive stick of receipts and 1099’s once a year. Of course, financial management and tax planning are good habits to get into even if you aren’t self-employed. Here are a few things to do throughout the year to make future tax seasons run more smoothly.

One-time tasks — do these now

• Open a separate checking account — and a credit card — for your business. If you haven’t already, open new accounts that you’ll use solely for income and expenses related to your freelance, contract or self-employed work. This will help you separate business spending from personal spending.
• Set up an account to save for your taxes. Start setting aside money right now so you don’t get hit with an unmanageable tax bill next year. Financial experts suggest at least 25-30 percent — though this will vary depending on your tax bracket. It’s helpful to have a designated account for your taxes so you aren’t tempted to use the funds for other reasons. Put the money aside and try to forget that it exists.
• Create a simple record-keeping and tracking system. A common mistake among freelancers and small business owners is not keeping detailed records, says Jenine Hurlbert, a CPA and the founder of Hurlbert and Associates in San Diego, CA. “Create a system you’ll actually use,” she says. “An expertly designed system is pointless if you never use it.” At a minimum, Hurlbert recommends having a place to store receipts, bank statements and business records; a business calendar; and a way to track business-related mileage. You can use anything from manila file folders in a box to a digital organizing system or bookkeeping software on your phone.
• Seek out professional help. Depending on your specific business needs (say, for example, you run a small business), it may benefit you to hire a bookkeeper to track your income and expenses throughout the year or a tax professional to prepare your annual returns or help you plan your quarterly tax payments. “As a business owner, you cannot do everything on your own,” says Ellie Thompson, founder of Money Therapy, a Washington, DC-based financial consulting firm. “Outsourcing and delegation are the keys to keeping your business running smoothly and efficiently.” If you don’t have a CPA, bookkeeper or financial planner, ask a business owner you know for a recommendation.

Weekly tasks

• Save your receipts. Keep digital or paper copies of invoices, bills and receipts. This will help you better track your income and spending, categorize deductions when you prepare your tax returns, and support claims if you are audited. Taking pictures of your receipts as you accumulate them, and storing them in a digital file, is a smart way to ensure hard copies don’t go missing over the course of the year. (Plus, it will save you space and clutter at home.)
• Keep your calendar up to date. Hurlbert recommends updating your business calendar frequently — even daily. Add errands, client appointments and networking events, and include the purpose of the event, who attended, and the location. This will support deductions on your tax return.

Monthly tasks

• Track your income and expenses. Take time each month (at a minimum) to go through your finances — match invoices with payments and transactions with receipts. Categorize everything. File away records using the system you created, and reconcile accounts so you can accurately estimate your quarterly taxes. The more often you do this, the less likely you will be to forget purchases or mix up paperwork. Ask your tax preparer for a list of deductions so you can mark expenses as you go.

Quarterly tasks

• Touch base with your CPA. Tax planning is an ongoing process, especially if you are self-employed. Hurlbert recommends checking in quarterly to ensure you make accurate estimated payments. You should also talk to your CPA before you make significant financial decisions or big purchases and at the end of each year to understand any changes in the tax code that may impact your planning. “Your tax preparer should not disappear when tax season ends,” she says.
• Make your quarterly tax payments. All earners must pay taxes throughout the year — not just when the April filing deadline rolls around. Employees have taxes withheld from their paychecks, but freelancers and other self-employed individuals have to do this themselves every quarter. You will be penalized if you don’t pay throughout the year. The IRS Form 1040-ES has a worksheet to help you figure out how much you owe each quarter. In general, the first payment is due on April 15, the second on June 15, the third on September 15, and the fourth on January 15 of the following year. If any of these dates fall on a weekend or holiday, payment is due the following day. You can make payments right from the account you created for your tax savings. The best way to avoid penalties is to pay your estimated taxes every quarter. However, if you make significantly more this year than you did last year, you only have to pay 100 percent of last year’s tax liability — the rest you can pay with your return. If you also have full-time employment, you can increase your withholding throughout the year or — if you paid significantly less than what you owe in taxes — toward the end to reduce the risk of penalties. Keep in mind: If you don’t have the option to withhold more with an employer, you can’t make a lump sum payment at the end of the year to make up for missed quarterly payments. You’ll be penalized for not paying taxes in any quarter in which you earned income.

Annual tasks

On a yearly basis, you'll file your tax return. Even though you’re paying your taxes on a quarterly basis, you have to file your individual return by April 15 (October if you request an extension) and your corporate or partnership return (if applicable) by March 15. Meet with your tax preparer well in advance of the deadline.

Depending on your business, you may have additional responsibilities throughout the year, including managing payroll for employees or setting aside money for retirement. Start right now with the small, manageable tasks and seek out help as you need it. Implementing these strategies throughout the year will save you from surprises when the 2019 tax season rolls around.

MORE TAX TIPS

• Counting on a tax refund? Here are some smarter ways to spend it
• Should you apply for a tax refund advance?
• 9 insider tips to make filing your taxes easier and cheaper
• Should you do your taxes on your cell phone?
• Here's what homeowners must remember at tax time this year

Want more tips like these? NBC News BETTER is obsessed with finding easier, healthier and smarter ways to live. Sign up for our newsletter and follow us on Facebook, Twitter and Instagram.