Freelancers have the luxury of controlling how much they work and the freedom to structure their life in a way they see fit. However, with that opportunity also comes responsibilities. You have to remember you are also running a business.

10 common tax mistakes freelancers make

1. Not consulting a professional: As a business owner, you have more responsibilities than a W-2 earner, before you make any significant changes in your business, you should consult a professional. A good example of a decision you definitely want to consult a tax professional about is changing your business entity. For example, changing from a sole proprietorship to a s corporation: While the s corporation structure might save you taxes, there are administrative requirements and expenses that most freelancers are not ready to deal with.
2. Not being organized: It is important to have a filing system for your expenses and business mileage. Depending on your credit card for documentation is not sufficient.
3. Counting total invoices as income: As a freelancer, you are probably a cash basis taxpayer. Which means you declare income when you receive the cash and not when you send the invoice. If you use a financial software be sure to print out the cash basis and not accrual basis financial statements at the end of the year.
4. Not having a collection policy: having a collection policy and letting your clients know about it is essential to decreasing the number of days it takes you to collect from your clients. The longer it takes to collect, the less likely you will collect from your customers.
5. Spending your business income like it’s your personal income: Your business income should be kept separate from your personal income. Regardless of what kind of business entity you are (Sole proprietor, LLC, S Corporation, C Corporation), treat your business income as separate from your personal income. Besides, having a system to pay yourself is one of the first steps to growing wealth in your business.
6. Not having a separate bank account for your business income: As a business owner, your business funds should be kept separate from your personal funds. When you pay yourself, you physically transfer funds from your business to your personal account.
7. Relying on 1099s: 1099s are issued by humans. You need to keep your own record of income earnings. In doing so, you can compare records to see if the 1099 issued to you is actually accurate.
8. Not declaring income that was not issued on a 1099: You should have a system of tracking income. Your total income is the total cash received and not just the amounts shown on 1099s.
9. Not paying estimated taxes: Not paying estimated taxes costs you more in taxes. You are penalized for not paying taxes on a “pay as you go” system. You should estimate your annual income and pay estimated taxes based on your income projections.
10. Ignoring reimbursed expenses: Expenses you pay with your personal funds should be carefully documented and presented to your business for reimbursement. The specifics of how you treat these reimbursements depends on your business entity. However, as a sole proprietor you should present the receipts to your business, document the expenses in your record book or software and then write yourself a check from the business.

These are just 10 mistakes I see freelancers make. If you do not plan carefully, taxes could eat up most of the income in your business. Also, what could have been an easy fix in the beginning can become a big mess if done wrong for a long time. It is best you consult a professional who specializes in freelancer’s tax issues rather than trying to figure it out yourself.