Common Tax Prep Mistakes for Freelancers

close up of businessperson with calculator cellphone and computer

A common misconception about freelancers is that we’re merely work-for-hires, who take whatever jobs come our way, and are more invested in maintaining a free-spirited, digital nomad life than making a decent living.

The truth? We’re busy running our own businesses. We have income goals, and aim to be strategic in everything from the clients we work with to how to boost productivity. As a solopreneur, we’re responsible for our own health insurance, have to save cash for vacation and sick days, and need to pony up for self-employment tax — all while living on an inconsistent income.

That being said, on top of meeting work deadlines and client demands, it’s easy to let our financial housekeeping fall to the wayside. And when tax season rolls around, when our bookkeeping is in a state of disarray, we hit the “panic” button. To spare the headache, stress, and costly mistakes, here are some common tax prep mistakes freelancers tend to make:

Getting Stuck in the Write-Off Mentality

Ever find yourself justifying a business-related purchase with the reason that you can simply “write it off” for taxes? I’ve heard fellow solopreneur friends buy fancy equipment that they don’t really need, or take an unnecessary work trip under the assumption that they’ll be “saving on taxes.”

But you’re not saving money by spending more of it. You’re simply lowering your taxable income. So unless you have a good reason to spend that money, it’s probably best to keep it sitting in your bank account.

“Spending to save on taxes makes no sense in many situations,” says Eric Nisall, a freelance tax expert and founder of AccountLancer. Nisall provides the following example: If you pay 30% in taxes, then every $100 you spend will potentially get you back $30. But if you keep the $100 and pay the $30 in taxes, you actually come out ahead. Doing some simple math, you can see that keeping $70 is greater than getting back $30, especially if you’re spending money on things you don’t really need.

There may be situations where it makes tax-sense to spend, but quite often you’re better off holding on to your money.

Not Using Proper Accounting Software

The first few years I freelanced, I went the cheapskate route and neglected to use proper accounting software. And when I did purchase a subscription to a cloud accounting software, it took me the third try to settle on a program that actually did everything I needed it to do. While I do pay a little more for my accounting subscription, I feel better about using software that accurately records my transactions and spits out reports in seconds. It’s easier for me to stay on top of my invoices, banking transactions, and business-related expenses. In turn, I know I won’t be missing deductions or overpaying Uncle Sam.

If you’re not sure which software to go with, try out a few and see which one works best for you. Many major services offer a free trial. You can also ask a tax professional, who can answer any questions you have, or help you with the initial setup.

Failing to Report All Income

This goes beyond your 1099s, explains Tai Stewart a tax professional and founder of the accounting firm Saidia Financial Solutions. Stewart explains that if a client has paid you more than $600 in the year, they’re required to issue a 1099-MISC. However, the income from the clients who paid you less than $600 also need to be included. “Don’t think that only the 1099s need to be reported,” says Stewart. “Your total income includes all the smaller invoice payments as well for businesses with cash-based accounting.”

So why shouldn’t you cut corners and skip reporting all of your income? Because trying to save on taxes by reporting less income could end up costing you more. “In the event of an audit, if it has been determined that you underreported income, you will be subject to additional taxes, penalties, and interest,” says Stewart. Be thorough and avoid an unpleasant conversation with the IRS.

Neglecting to Have a Solid Bookkeeping System

It’s important to maintain your day-to-day bookkeeping, points out Katherine Pomerantz, founder of The Bookkeeping Artist. However, we freelancers are too busy hustling and running our own businesses to take care of these day-to-day administrative tasks.

I personally aim to tend to my bookkeeping at least once a week. I’ll check on my business-related expenses to ensure they’re properly recorded and categorized. And about once a month, I’ll send invoices to my clients.

“A good bookkeeping system can help you stay disciplined, but for most freelancers the best option is sucking it up and hiring a bookkeeper. Or at least an assistant to help you send invoices,” says Pomerantz. “Remember: The less time you spend on admin, the more time you have to make money. Plus, tax time really will be a piece of cake without the last-minute scramble.”

Not Having a Holistic Plan

In other words, are you looking at the larger picture and your financial needs as a freelancer? Pomerantz recommends you ask yourself the following: Are you saving for retirement? Are you keeping yourself healthy? Do you have insurance in case you're ever disabled or can't work?

Looking at all aspects of your financial health can lead to greater tax savings. “Most people don't consider these things when they plan for taxes, but each of these provides a significant tax break for a freelancer,” explains Pomerantz.

What’s more, they protect freelancers against financial disasters. “You might not be worried about building these financial buffers now, but nothing makes tax time more stressful than not having the money to pay your taxes,” says Pomerantz. “These big-picture questions can protect your savings and help you file on time.”

Writing Off Deductions You Don’t Qualify For

Another mistake that freelancers make in the pursuit of saving money is claiming tax deductions they don’t actually qualify for, which could end up nipping them in the bud later on. Some commonly misapplied deductions? Stewart points that many freelancers try to deduct clothes — everyday clothes not exclusively used for the business aren’t deductible.

We freelancers are also sometimes guilty of trying to deduct home office expenses for spaces not used exclusively for operating business. Another popular misapplied deduction is meals, such as for regular, everyday lunches. Only meals relating to your business can be written off. If you’re unsure if your expense qualifies for a deduction, check out what the IRS lists as qualified expenses, or seek the advice of a professional.

Not staying on top of your financial housekeeping can certainly cost you tax-wise — in time spent, by overpaying, or by getting penalized for tax blunders. By minding these common tax prep mistakes, you can run a more efficient freelancing business. 

Tagged in Inconsistent income, Taxes, Insurance

Jackie Lam is an L.A.-based personal finance writer who is passionate about helping creatives with their finances. Her work has appeared in Forbes, Mental Floss, Business Insider, and GOOD. She blogs at heyfreelancer.com.

  • The Consumer Federation of America (CFA) is an association of nonprofit consumer organizations that was established in 1968 to advance the consumer interest through research, advocacy, and education. Today, nearly 300 of these groups participate in the federation and govern it through their representatives on the organization's Board of Directors.
  • The National Council of Higher Education Resources (NCHER) is the nation’s oldest and largest higher education finance trade association. NCHER’s membership includes state, nonprofit, and for-profit higher education service organizations, including lenders, servicers, guaranty agencies, collection agencies, financial literacy providers, and schools, interested and involved in increasing college access and success. It assists its members in shaping policies governing federal and private student loan and state grant programs on behalf of students, parents, borrowers, and families.

  • Since 2007, the Homeownership Preservation Foundation (HPF) has served as a trusted, neutral source of information for more than eight million homeowners. They are partnered with, and endorsed by, numerous major government agencies, including the U.S. Department of Housing and Urban Development and the Department of the Treasury.

  • The mission of the U.S. Department of Housing and Urban Development (HUD) is to create strong, sustainable, inclusive communities and quality affordable homes for all. HUD works to strengthen the housing market in order to bolster the economy and protect consumers; meet the need for quality affordable rental homes; utilize housing as a platform for improving quality of life; and build inclusive and sustainable communities free from discrimination.

  • The Council on Accreditation (COA) is an international, independent, nonprofit, human service accrediting organization. Their mission is to partner with human service organizations worldwide to improve service delivery outcomes by developing, applying, and promoting accreditation standards.

  • The National Foundation for Credit Counseling® (NFCC®), founded in 1951, is the nation’s largest and longest-serving nonprofit financial counseling organization. The NFCC’s mission is to promote the national agenda for financially responsible behavior, and build capacity for its members to deliver the highest-quality financial education and counseling services.