The information in this article is up to date for tax year 2024 (returns filed in 2025).
A growing number of individuals are leaving traditional employment for the flexibility and freedom of freelancing, gig work, and sole proprietorships. While this shift offers numerous personal and financial benefits, navigating self-employment taxes can be tricky. While traditionally employed workers can rely on their employers to withhold the right amount of taxes, the self-employed are entirely on their own. Without proper tax planning and record-keeping, the IRS might come knocking. Luckily, by following our tax tips, you can maximize your tax savings and minimize the stress of filing self-employed taxes.
Apply for an Employer Identification Number (EIN)
As a sole proprietor, you might think that you only need your Social Security Number (SSN) for tax filing, but this isn’t always the best option. Applying for an Employer Identification Number (EIN) is a smart move for anyone self-employed, including freelancers, gig workers, and sole proprietors. While sole proprietorship taxes are generally filed on your personal return, having an EIN is important for separating business and personal finances.
By applying for an EIN through the IRS website, you’ll gain access to various business opportunities such as opening a business bank account, applying for business credit, and securing loans or financing for future growth. It’s also a valuable step for tax compliance and filing your self-employed taxes.
Set up a separate bank account for your business
One of the most crucial steps in managing your self-employment taxes is keeping your business and personal finances separate. Sole proprietors, freelancers, and gig workers should open a dedicated business bank account to track income and expenses efficiently. The IRS closely monitors returns involving business income, and mingling personal and business funds can lead to mistakes or even audits.
With your EIN, setting up a business account is easy. This account will help ensure your business income and expenses are organized, making it easier to file accurate self-employed taxes and avoid confusion during tax season.
Use a business credit card for business-related expenses
In addition to a business bank account, applying for a business credit card can make filing taxes a lot easier. Many business credit cards offer valuable benefits for freelancers and sole proprietors, such as tracking year-end expenses and categorizing business-related purchases. This year-end summary is particularly helpful for tax preparation, making it easier to identify deductible business expenses when filing self-employment taxes.
Using a business credit card ensures that your personal and business finances remain separate, and it can help you monitor your business expenses year-round.
Keep scrupulous records of your business finances
For anyone self-employed, keeping meticulous records is key. Self-employed workers, including gig workers, freelancers, and sole proprietors, should regularly track both income and expenses. The IRS requires accurate reporting of all business income and deductions, and failing to maintain proper records can increase the likelihood of mistakes or an audit.
Whether through a simple spreadsheet or accounting software, tracking your business income and expenses will make tax season more manageable. By keeping accurate records, you’ll also be able to take full advantage of available tax breaks and reduce your self-employment taxes.
Contribute to retirement plans for the self-employed
Self-employed individuals face unique challenges when it comes to retirement savings. However, contributing to a retirement plan for the self-employed can significantly reduce your tax liability while helping to secure your future. Self-employed retirement plans, such as a Solo 401(k), offer tax-deferred growth and the opportunity to contribute as both the employer and employee, maximizing your retirement savings.
By contributing to a self-employed retirement plan, you’ll lower your taxable income and reduce the amount you owe to the IRS, all while building a solid retirement nest egg. These contributions are one of the best tax tips for minimizing self-employed taxes.
Set reminders for quarterly tax payments
One of the most overlooked aspects of self-employment taxes is the requirement to make quarterly tax payments. Since freelancers, gig workers, and sole proprietors don’t have employers withholding taxes for them, they are responsible for paying taxes four times a year.
Sole proprietor tax responsibilities can be challenging to estimate, especially since self-employment income can vary. Setting reminders for each quarterly tax payment deadline can ensure that you don’t miss the due date and avoid potential penalties for late payments. By making those required quarterly payments, you’ll avoid a large tax bill at the end of the year, helping to reduce the burden of sole proprietorship taxes.
Maximize business deductions for tax savings
As a sole proprietor, freelancer, or gig worker, you have the opportunity to claim various business deductions that can reduce your taxable income. Deductible expenses may include home office expenses, vehicle mileage, equipment, supplies, and even internet and phone bills used for business purposes. Tracking deductions can be challenging, but with proper documentation and organization, you can ensure that you’re getting every tax break available, ultimately reducing your self-employment taxes. Get started now with ezTaxReturn to file your self-employment taxes accurately, maximize your deductions, and avoid costly mistakes.
Navigating taxes as a self-employed individual
Being self-employed can be amazing, with freedom and flexibility the traditionally employed can only dream about. Even so, taxes are more complicated for sole proprietors, freelancers, and gig workers. Staying organized and following these tax tips can make the process much easier. By applying for an EIN, keeping business finances separate, maintaining accurate records, and seeking out self-employed retirement plans, you can maximize your tax savings and minimize your risk of IRS scrutiny. Stay proactive by setting quarterly tax reminders and utilizing business deductions to ensure that tax time is as stress-free as possible.
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The articles and content published on this blog are provided for informational purposes only. The information presented is not intended to be, and should not be taken as, legal, financial, or professional advice. Readers are advised to seek appropriate professional guidance and conduct their own due diligence before making any decisions based on the information provided.
