Smart Tax Tips for Sole Proprietors, Freelancers, and Gig Workers

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The information in this article is up to date for tax year 2023 (returns filed in 2024).

A growing number of men and women are abandoning the traditional workplace, choosing instead the freedom and flexibility of gig work, freelancing, and business ownership. Those sole proprietors, freelancers, and gig workers can enjoy a host of personal and financial benefits, but when it comes to filing taxes, things can get a bit complicated.

While traditionally employed workers can rely on their employers to withhold the right amount of taxes, the self-employed are entirely on their own. It is up to them to get their taxes right, and if they fail to do so, the IRS just might come calling. File with 100% accuracy and get every tax break you deserve with ezTaxReturn. You’ll enjoy the benefits of being a sole proprietor, gig worker, or freelancer without running afoul of the IRS.

Taxes may be complicated for this cohort of workers, but following these best practices should provide at least some level of protection.

Apply for an Employer Identification Number (EIN)

When freelancers, sole proprietors, and gig workers file taxes, they typically do so on their personal tax returns. This combination approach is faster, easier, and less expensive, but that does not mean that relying on the Social Security number alone is appropriate.

Even if your business is a sole proprietorship, it makes sense to establish an employer identification number (EIN). Sole proprietors may operate independently, without actual employees, but the IRS still views them as employers.

Thanks to the self-employment tax, those who go their own way are viewed by the IRS as both employer and employee, hence the importance of the EIN. Applying for an EIN is fast and easy — it can all be done on the IRS website. Once that number has been obtained, it can be used to open a business bank account, apply for credit, and even seek financing from banks and local lenders.

Set Up a Separate Bank Account for Your Business

Keeping business and personal income and expenses separate is essential for sole proprietors and anyone else who is self-employed. The IRS closely looks at returns with business income, and even a simple mistake could trigger an audit or further examination by the tax agency.

One of the best and easiest ways to maintain that wall of separation is by opening a separate bank account for your business. If you have applied for and received an EIN, you can use that identification number; if not, you can simply use your personal Social Security number. The goal is to keep your business separate, and once the account is open, you can funnel your income into it and use the account to pay for applicable expenses.

Use a Business Credit Card for Business-Related Expenses

Having a separate bank account is important, but you may want to go one step further. Applying for a business credit card will give you an easy way to pay your bills and an easy way to keep track of your expenses.

Many business credit cards even provide sole proprietors and freelancers with a year-end list of their spending. That accounting can make filing taxes a lot easier, so ask the bank if they provide that kind of benefit before you apply.

Keep Scrupulous Records

Even if you have a separate bank account and credit card to guide you, it is important to maintain scrupulously accurate records. That might involve maintaining a spreadsheet listing your business expenses or tallying up your income as each payment comes in. No matter how you do it, keeping accurate records will be vital for filing taxes and staying on the right side of the IRS.

As your business grows, you might want to invest in accounting software as well. Even if hiring an accountant is not in the budget, self-directed software can make keeping track of your income and expenses easier. Some software packages even integrate with popular tax preparation packages, making it even easier to file taxes.

Seek Out Retirement Plans Aimed at the Self-Employed

Being self-employed can be expensive, but there are ways to make it less so. One of the best ways to reduce your tax bill is contributing to a retirement plan, and as a self-employed individual, you will find plenty of great ones to choose from.

Lowering your tax bill by saving for the future gives you a double benefit — you will pay less in taxes now, and you will help to secure a financially flush retirement. If you have an EIN, you can even set up your own solo 401(k), a plan with the same benefits as a traditional 401(k) but aimed squarely at the sole proprietor.

Set Reminders for Quarterly Tax Payments

One of the least pleasant aspects of being self-employed is settling up with the IRS. Those with traditional jobs can rely on their employers for withholding, but the self-employed are typically required to make quarterly payments to the IRS.

It can be difficult to determine the amount of those payments, especially since self-employment income is notoriously unpredictable. Even so, making an honest assessment and paying accordingly is part of being self-employed, as is making those required payments on time. Setting reminders for each quarterly payment will help ensure you do not miss writing that required check.

Being self-employed can be amazing, with freedom and flexibility the traditionally employed can only dream about. Even so, taxes are more complicated for the sole proprietor, and it’s important to do your homework and know what you are getting into. The tips listed above can help you make tax time less taxing as you forge your own path and go your own way.

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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.