Going Freelance in 2022? 3 Tax Moves to Make Right Away

Check these off your to-do list to avoid problems.

The events of the past couple of years have prompted some workers to reassess their job situations. And a lot of people have decided to take the leap and become self-employed.

From a tax standpoint, there are pros and cons to going this route. And there are also new rules you'll need to follow. Here are some essential steps to take once you make the decision to go freelance.

1. Get help

Salaried employees have taxes taken out of their paychecks, and they also can't deduct the expenses they incur in the course of working (like the cost of commuting). But when you go freelance, it's on you to pay your own taxes and track the right expenses, so it's a good idea to enlist the help of a professional who knows the rules well.

2. Figure out a good record-keeping system

As a freelance employee, you're entitled to deduct expenses you incur that make it possible to do your work. And so it's important to track those expenses so you know what amounts to claim on your tax returns.

Some freelancers use a standard folder and filing cabinet system for keeping track of their expenses. But you may decide to store your receipts electronically to minimize the chances of things getting lost.

At the same time, you'll also need to find a good system for tracking your payments. You might consider opening up a separate checking account so that all of your work-related payments can flow into the same place.

3. Budget for estimated quarterly taxes

When you work on a freelance basis, you don't have taxes taken out of your earnings. And so it's on you to pay the IRS its share of your earnings every quarter.

Why can't you just settle your IRS bill at the end of the year, or when you file your annual tax return? Simply put, because that's not what the IRS wants. The IRS wants workers to pay taxes on their income as they earn it. That's why salaried employees have taxes withheld from every paycheck. As a freelancer, you're subject to the same rules, so prepare to pay the IRS quarterly to avoid costly penalties.

This is another reason why it's important to team up with a tax professional once you go freelance. That person can help you estimate your quarterly taxes and plan for them.

There are definitely perks to being a freelancer, like setting your own schedule and, in many cases, getting to work from anywhere. But make sure to tackle these important items once you decide to become self-employed.

At the same time, you may want to rework your budget once you go freelance to account for the fact that you may not end up getting paid on such a predictable schedule. Freelancers often have variations in income, and they often have to wait longer than salaried workers to get paid. So while all of the above tax moves are important, you should also set yourself up to avoid a crunch in the wake of a new and potentially erratic payment schedule.