Most Common Tax Mistakes Self-Employed Workers Make

For those holding traditional employment, taxes are relatively straightforward. On the other hand, it’s a whole new ball game for those just leaping self-employment. Dozens of clients, multiple sources of income, heaps of expenses to keep tabs on, various deductions, multiple tax forms, quarterly tax filings, and at all levels of government. Saying this leaves quite a lot of room for mistakes would be an understatement. More appropriate would be to say that it’s a minefield. Below, we will look at some of the most common tax mistakes self-employed workers make.

Most common tax mistakes self-employed workers make

1. Not seeking professional advice

One of the most common tax mistakes self-employed workers make is not contacting a professional for advice. At the best of times, taxes are complicated. Most veteran freelancers can puzzle out their way through tax season. But if it is your first time filing self-employment, no doubt the process will make your head spin. 

Luckily, seeking professional advice can make your life a lot easier. Accountants know the ins and outs of complex tax legislation, deductions, and other loopholes that you need to be aware of and keep up-to-date on any newly rolled-out reforms. Self-employment taxes are a lot more complex than W2 taxes. So, teaming up with a professional is a surefire way to:

• stay on track with changing laws and regulations, 
• reduce the possibility of error, 
• maximize your return, 
• and plan for the future. 

2. Poor record-keeping

That is a big one. If you decide to file taxes yourself, you must ensure that the records of all business income and expenses are complete, detailed, accurate, and up to date. Why? Poor record-keeping is one of the vulnerabilities of the self-employed for several reasons. First, losing track of all the incoming and outgoing transactions is easy if you don’t update your records regularly and in real time. Trying to calculate everything at the last minute may quickly become a nightmare game of connecting the dots. At that point, filing an accurate tax return is next to impossible. Plus, should your account be selected for audit, the IRS has the full right to ask for a clarification of any business expenditure within the last three to six years. So, you may be in a challenging situation if you haven’t kept records of your finances.

Having a proper record-keeping system in place will help you keep track of your expenses and thus comply with tax legislation and avoid hefty penalties. You can use accounting software, a dedicated paper notebook, or a simple spreadsheet. Also, expense tracker apps are a fantastic way to keep tabs on your business expenses, especially if you’re likely to lose paper receipts. 

3. Mixing personal and business expenses

Often self-employed individuals don’t see the need to open a business bank account when they already have a personal bank account. But just like most things in life, bookkeeping, too, has some rules. And, one of the major ones? Keeping your business finances separate from your personal funds.

For one thing, if your business happens to have a loan or debts it cannot settle, you’re putting your assets at risk. Second, you might miss out on many essential tax deductions, thus failing to lower your tax bill. Or you can make the mistake of writing off your expenses along with your business expenses, which automatically triggers a red flag with the IRS. 

These things happen because you can easily mix personal and business expenses. For instance, if you’re moving your home office or private residence for business reasons, and plan on hiring a moving crew, your moving expenses may be deductible. On the other hand, if you have set up a home office, you can only write off the business part of the utility bills.

4. Ignoring cash flow

Another error the self-employed often make is to ignore the cash flow. A positive cash flow is the oxygen of any business, and invoicing customers promptly is essential for it to be successful. The sooner they know the sum owed, the sooner they’ll get it back to you. That allows you to settle any liabilities with your suppliers on time, thus avoiding unnecessary late fees and staying in their good books. 

On the other hand, failing to invoice promptly means that your clients will take longer to pay. That can, in turn, cause a delay later down the line and cash flow issues.

5. Not budgeting for taxes

Tax preparation and filing the paperwork is one thing. But having the funds to pay when that big bill comes is another. And not budgeting for taxes is one of the sole proprietors’ biggest tax mistakes. Unlike someone with a traditional job, you aren’t paying taxes every paycheck. So, be wary. 

To successfully fulfill your total tax obligation, be sure to plan. It’s best to set money aside regularly. Experts recommend implementing the ‘rule of 30 percent,’ which means saving thirty cents for every dollar you bring. Doing this, you’ll avoid paying an enormous tax liability in one chunk when the tax time comes.

6. Not knowing your tax deductions

Self-employed folks are entitled to write off a heap of different expenses – expenses they would otherwise not be able to write off. Still, where most go wrong is sticking to a small handful of obvious ones, not knowing that there’s, in fact, a bountiful world of write-offs out there waiting for them. Most are shocked when they learn you can deduct a portion of your phone bill, health insurance payments, miles driven for business, et cetera. That’s a whole lot of tax write-off opportunities and tax savings that you’re missing out on.

Still, although one of the common tax mistakes self-employed workers make, this is one of those you can very easily avoid. What is the best way to take full advantage of every deduction they’re entitled to? Naturally, it’s crucial that you plan your taxes and finances carefully. More importantly, consult with professionals ahead of time to clarify what you can and cannot write off.