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The countdown to tax season has officially begun. If you’re a content creator or freelancer, figuring out how to approach filing your taxes might seem extremely intimidating. Even if you’re comfortable, taxes can still be overly complicated. You don’t want to make any of the common mistakes freelancers make on their taxes.
Between figuring out what expenses to deduct to deciding if you should form your own LLC or not, there are a lot of unknown decisions that you might have to make before filing your taxes.
To help you prepare and to reduce your tax bill as much as possible, JustAnswer tax expert and certified public accountant (CPA) Moira Corcoran shared the eight things that every freelancer or content creator misses on their taxes—and how to make sure that doesn’t again this year.
Eight mistakes every freelancer makes on their taxes:
1) Treating content creation like a hobby when you start making money
Whether you are a content creator who has affiliate and brand deals or you are just starting out, it doesn’t matter: Corcoran said that eventually, you need to show the IRS that you’re making a profit.
“In order to prevent being considered a hobby, you have to show a profit in three of the last five years,” Corcoran told Passionfruit. “If you are considered a hobby in the eyes of the IRS, you are no longer allowed to deduct any expenses.”
If you’re halfway through the year and wondering if you’re profitable, consider reaching out to your accountant. Get a breakdown of the health of your finances. At the very least, do an audit on your own to determine profit and losses.
2) Not forming an LLC
Once you start generating income as a content creator, you might decide it’s time to operate as a business entity. This gives you more options when it comes to your finances. For example, you can deduct expenses or get a business credit card.
Corcoran said that when the time comes, you don’t have to create an LLC to start a business. However, it does come with protection perks that help separate your personal assets from any potential liabilities, such as lawsuits.
“In order to prevent personal liability, starting an LLC and opening a business bank account is a great way to get started,” Corcoran said. “If there are any liability claims to the sole proprietor and they have no LLC, the party filing suit can take everything (house, car, cash, etc) instead of just business assets.”
3) Forgetting to claim every expense you can
As a content creator, you might not even realize how many everyday expenses are tax deductible. Expensing items you use for work, such as a computer and phone, is just the start. Corcoran said you can also deduct health insurance and retirement contributions.
However, she did advise that you work with an experienced CPA or tax preparer. Their knowledge about what deductions you are actually eligible for can save you unexpected money.
4) Not filing quarterly
One of the biggest mistakes Corcoran said creators make is not realizing they need to file quarterly taxes. This is something that might have been withheld on their behalf by previous employers.
But as your own boss, it’s important to remember that taxes must be paid as you earn income during the year. You do this either through withholding money or estimated tax payments.
“In order to prevent penalties and interest for not paying quarterlies, taxpayers need to make sure they are calculating their tax liabilities correctly,” Corcoran said.
To make this recurring and easy, Corcoran recommended working with a CPA.
5) Only looking for financial advice at tax time
After tax season ends, people don’t want to think about filing again for at least another year. But Corcoran said that it’s a good idea to chat with a financial advisor or CPA throughout the year—not just when it’s time to do your taxes.
“Checking in with your accountant quarterly is a great way to stay ahead of the curve so there are no surprises at tax time,” she said.
6) Doing both your personal and business taxes yourself
It’s completely fine to do your own taxes, but Corcoran warned that if it’s your first time filing as a self-employed content creator, get help. You might start to see that your tax return is more complicated than you predicted it would be.
“Unless they have experience in preparing these types of returns, it is important to work with an experienced CPA or tax preparer to make sure the return is prepared correctly and all deductions the taxpayers are eligible for are deducted,” she said.
7) Not saving money all year for tax time
It doesn’t matter if your income as a content creator ebbs and flows throughout the year. Corcoran recommended creators put money away as often as they can. That way if they are hit with a huge tax bill in April, there is a financial buffer.
“Set aside cash to pay your tax liability so you can avoid having IRS debt along with penalties and interest,” she said.
8) Not taking into account social security and medicare taxes into account
One final tip Corcoran said a lot of people might miss is that when you’re paying taxes, you also have to pay a 15.3% self-employment tax, which is made up of 12.4% for Social Security and 2.9% for Medicare.
“This is on top of your ordinary tax due. It is important to make sure to calculate the additional 15.3% due in your estimated payments,” she said.
However, Corcoran shared that if you do not pay into Social Security and Medicare, you are subject to penalties and interest, plus no benefits when you hit retirement age.