4 Freelance tax lessons I learned the hard way

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Let’s rewind to mid-April 2015.

I’d gone back to my home town to celebrate my mom’s birthday, and to visit my accountant to finally file my taxes.

(I’m usually not one to wait until the deadline, but a hiccup with the healthcare marketplace meant I got some needed documents late.)

I’d emailed my accountant all my documents ahead of time so she could go ahead and get things prepared. So when I walked in with the document and the check to pay her, I was expecting everything to be fine and dandy…to see the total amount owed more or less matching what I’d set aside for taxes.

Sidenote: Once you finish, read how 4 freelancers built recurring revenue models that changed their business. You'll love it.

But it didn’t match.

And it wasn’t in my favor.

In fact, I owed close to $3,000 more than what I’d set aside, and I couldn’t fathom where all that was coming from.

So after the shock subsided, I realized that unexpected money came from three things:

  • A fee from the government for not paying quarterly
  • A higher self-employment tax percentage than she let on
  • State tax

The year before, I made it a point to ask her how much I needed to set aside for taxes, and she told me a percentage.

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Thinking I could 100% trust a friend’s mother, I took her advice at face value and saved that amount aside dutifully.

Every single month.

In fact, I didn’t take my business expenses into account, so I actually thought I’d have some left over.

Luckily, the amount set aside covered most of the bill…but I still had well over two grand to make up for, and I had to do it FAST since it was the deadline.

I ended up raiding some of my savings, which I hated doing, but in that moment, it had to be done.

I tried extra hard the next few months to make up the difference and pay myself back, but the worst part was how totally withdrawn I was during my mom’s birthday celebration.

I could hardly bring myself to smile, and I felt like a horrible daughter because of it.

I also felt like a total fake, since I’d recently been feeling pretty proud of myself for having a super healthy financial situation.

But that experience taught me some hard lessons…ones that I took with me into 2016, and ones I’m continuing to use in 2017 to make sure I start every single year off on the right foot, and never have to feel financial desperation like that again.

Lesson #1: Use an accountant who specializes in helping self-employed people

At the time of writing, I had a meeting with my new, replacement accountant yesterday.

I found him by asking around in my network of other self-employed people in my city, and his office actually came up twice.

Yes, the fees are a little higher, but oh my gosh.

In fact, we reviewed my 2015 taxes again during this meeting, and found another place where my previous accountant gave me bad advice, and where I could have saved another $1,000 in taxes paid.

Also, he pointed out at least three areas where I qualify for tax deductions that she didn’t even tell me about.

So there’s that, too. Who knows what that cost total could have amounted to.

If I’d hired him long before—even with his higher fees—he’d have been totally worth it.

So don’t budget-shop when it comes to finding an accountant to prepare your taxes. Ever.

Lesson #2: Look up your tax rates for yourself

Never take anyone else’s word for it.

It turns out, based on my income level, she’d only advised me to set aside money of income tax, and nothing else.

She didn’t tell me about social security tax…or that the rate paid was so much higher than the social security tax employees usually paid.

And there also wasn’t any mention of state tax, either.

Luckily I didn’t own property (besides my car—whose tax is paid separately) or live in an area where there’s an additional city tax.

But if that’s you, make sure you check out what all of your tax rates are that you’re responsible for and total THAT percentage into the amount you set aside every single month.

Otherwise, you’ll come up short and have to scramble to make up the difference.

Lesson 3: Pay quarterly

Fortunately, you don’t get penalized if you pay your quarterly taxes late—as long as they’re paid before the year is up.

And paying is not the same as filing, so you don’t have to fork over an accountant’s fee every single time you need to send a check into the IRS or your state tax department.

But if you want to avoid a fee (and you do), your accountant should tell you what your quarterly minimums are based on your last year’s revenue, and you should send them in.

The good news is, if you earn more money, you still only have to send in the minimums to avoid the penalty, and can make up the difference when you do your yearly filing.

Luckily, my fee wasn’t too huge because my 2014 income was rather low. (I spent most of the year traveling and not making money.) But this could be a serious sting if you don’t do it.

Lesson 4: I needed an S-Corp

I’d heard hearsay that I could save money by filing taxes for myself and my LLC separately, but I’d never had anyone explain it to me.

Luckily, my new accountant cleared everything up for me, and it’s pretty clear that I not only should have incorporated my LLC when I founded it (2015), but that I could have saved $1,000 on 2015’s taxes.

And I don’t know about you, but I can do a lot with $1,000.

And since I made a lot more money in 2016, who knows how much more I could have saved. (I don’t want to think about it. It’s too painful.)

But I will most definitely incorporate my LLC in 2017, giving me privy to save money on payroll/social security/self-employment tax.

Conclusion: don’t be penny-wise and found-foolish

Yes, my previous accountant was cheap. There’s no two ways about it. I feel like she probably gave me a bit of a friends and family discount, which I appreciate, but her services just weren’t for me.

She’s perfect for people who are full-time employees and who are on a budget.

But she’s not perfect for someone who’s self-employed and strives to make a substantial income every year.

So even though I saved a lot of money on her fee, it ended up costing me in the long run.

So if you don’t take anything away from this article except for this piece of advice, take this: budget shopping for a business accountant is not worth it.

You’ll pay more in fees, but the amount you save in the long run will be worth it, every single time.

What experiences have you had with paying taxes? Tell us in the comments!

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About Chelsea Baldwin

Chelsea Baldwin runs Copy Power, where she teaches how to reverse-engineer copywriting based on psychology to get your readers hooked on you forever. She wrote a free ebook that’ll help you keep your traffic from bouncing and get more leads and conversions on your site.

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Comments

  1. Great advice!

  2. Hi Chelsea, I believe that many freelancers make the same mistake of hiring the wrong accountant out of ignorance. The fact remains that any freelancer requires the services of an accountant whom is well versed in their specific domain of professional practice … and who who knows which expenses are deductible and how to file them correctly. An accountant whom is unfamiliar with my domain may feel that my submitted professional expenses (such as an invoice for the rental of a parachute, as an example) is an unrelated personal expense, rather than a legitimate professional expense. I do not skydive (lol) nor do I wish to, but I may be required to rent a parachute, skydiving gear and a model to take accurate reference photographs for a client illustration. All very necessary to execute and deliver an illustration of the required quality, as agreed in the contract. I don’t get paid if I don’t deliver an accurate final illustration, as expected. I stand to loose a lot of profit, if such business expenses are not deducted against my income (as unusual as these expenses may appear to people unfamiliar with my work), … because my chosen accountant has no understanding of my domain of activity, and has no idea how to deduct such legitimate expenses (which they have not bothered to look into). The reality is, that many may not realize how much money they are losing for a long time … as the ignorant accountant will continue to mislead and misinform their clients regarding acceptable and permitted deductions. Their clients are none the wiser. The blind leading the blind. Many of us need to spend the money to make the money … all part of the process, in any particular line of work. The accountant may simply believe that I am trying to pass off a personal expense as a business expense … because they don’t understand the business of producing commissioned artwork. The accountant often never sees, nor understands the contracts, may not understand that I am actually selling specific reproduction copyrights on artwork (rather than selling the artwork itself) … nor understand percentage fee rates paid to representatives, the nature and cost of promotional expenses etc. etc. … as all such details may not be very obvious from the accounting files or invoices submitted. The accountant may not fully understand the nature of the transactions in the accounting, as they simply have never dealt with clients in that particular field, and don’t truly know which laws apply.