Proactive Tax Planning for Freelancers: How to Avoid Overpaying

As a freelancer, it's important to be strategic about your taxes to avoid overpaying. Here are three common (and costly) mistakes freelancers make when it comes to taxes: 

1.  Failing to think about taxes proactively. 

Waiting until the end of the year to start thinking about taxes leaves little room for reducing your tax liability. Instead, consider tax planning throughout the year to help minimize your tax burden. Keep accurate records of your income and expenses and estimate your taxes quarterly to avoid penalties and interest charges. 

2.  Not opening an LLC early on. 

Self-employment taxes are the number one enemy of freelancers, and once you start making consistent money, you'll want to use an S Corporation to help lower your taxes. Running your income through an LLC gives you options and flexibility to elect S-Corp status with the IRS. Consider opening an LLC right away, even if you aren't ready for an S-Corp yet. 

3.  Failing to document all eligible deductions. 

Whether or not an expense is deductible depends on whether it is "ordinary and necessary" in the operation of your business. There is no comprehensive list of deductions, but you can find resources online to help guide you. Review these resources and document every deduction that fits the criteria. This can help lower your tax liability and save you money. 

Ultimately, every freelancer needs to take ownership of their own tax planning. While a CPA or tax preparer can help, they don't understand the specifics of your situation as well as you do. By being proactive, opening an LLC early on, and documenting all eligible deductions, you can avoid overpaying taxes by thousands of dollars every year.