Earned a Lot More Freelance Income in 2023 Than 2022? Here's One Move You May Want to Make

One of the trickiest things about being a freelancer is not getting paid a consistent wage, and not having taxes taken out of your earnings. Rather, if you're self-employed or own a small business, it's on you to make estimated tax payments to the IRS every quarter of the year. You're not allowed to just write the IRS a giant check when you file your tax return, because you're supposed to be paying taxes on your income as you earn it.

However, there is some leeway if your estimated tax payments aren't 100% accurate. As long as you're making them consistently and you end up paying close to the right amount of tax during the year, you can potentially avoid being penalized for an underpayment when you file your tax return.

To be clear, you'll still owe the full amount of taxes. But if you didn't quite pay the IRS enough during the year and you send in the difference when you file your tax return, you won't automatically be looking at a penalty.

Ideally, as a freelancer, your income will increase from one year to the next. If that happened in 2023 compared to 2022 but you didn't increase your estimated tax payments, you may be looking at owing a bunch of money to the IRS in 2024. And, if your underpayment is significant enough, you may be assessed a penalty. But there's a move you can make in the coming weeks to potentially avoid that situation.

Be strategic with your billing

When we talk about income for tax purposes, one thing you should know is that it doesn't matter when you earn money so much as when you're paid money. With that in mind, if you're worried about your 2023 tax bill, one thing it pays to do is wait until the very end of December to bill your clients for recent work.

The reason? If you send out invoices on Dec. 31, you're probably not getting paid on Dec. 31. And as long as you get paid on Jan. 1 or later, that income will count for 2024 purposes, not 2023.

Of course, in that scenario, you risk winding up in a similar boat in 2024. Another option you have is to work with an accountant to increase your estimated tax payments in the new year.

Make sure you have a good accountant in your corner

When you earn a living as a freelancer, your tax situation immediately becomes more complicated. So it's really important to have a good accountant who can help you manage your tax payments and find ways to keep your tax burden to a minimum.

If you've been handling your finances solo, now's a good time to line up some help for early 2024. If you wait beyond mid-January, you may find that it's harder to find someone because accountants tend to get busy with tax season from that point through mid-April.

A good accountant can not only help you set up your estimated tax payments, but also advise you on strategic moves that could help minimize your IRS burden. Those could include maximizing a retirement account like an IRA or being strategic with investment losses in a taxable brokerage account.