People work in many different ways.
Some people are part of a corporation, some own their own business, and some work on a freelance basis.
For this blog, we’re going to look at the latter, and delve into the world of tax returns for freelancers.
A freelancer works on a job-by-job basis, and the income they receive may vary depending on the workload and the type of jobs available.
This can make tax returns tricky, and in this guide from the team at Blue Rocket Accounting, we’re going to look deeper into this as well as supply some tips for acing your tax returns every year.
Let’s take a look.
Why are Freelancer Tax Returns Difficult?
Being a freelancer has many benefits. You are free to decide your own workload, and in essence, are your own boss.
While there are many positive sides to this, when it comes to tax returns, things can get difficult.
There are many reasons for this, including:
· Varied Income Sources – Keeping track of your income from every different client and project can end up getting a bit messy if you’re not on top of it. This can make calculating and reporting earnings a long and convoluted task. With varied income sources come different levels of pay throughout the year, and this can make estimating your returns even more tricky.
· Bi-Annual Payments – Most people employed by a company will have their taxes automatically reduced from their wages. This isn’t how it works with freelancers, who have to be on top of their payments, often asked to pay every six months. It can be hard to keep track of this and avoid paying the wrong amount.
· Complex Legislation and Rules –The UK is known for having a complex tax system, and if you work alone, you may find there is a lot to learn to ensure you are submitting your tax returns in the right way. For example, VAT registration, keeping up with national insurance payments, and ensuring you are using the right tax codes are pivotal and need to be learned.
There are many other reasons that tax returns can be tricky for freelancers, and to help out, here are seven tips to get you started.
Top Tips for Freelancer Tax Returns
Keep Detailed Records
As with all accounting and bookkeeping processes, being organised is key.
With varying income sources to contend with it is vital you keep detailed records and store them in an organised, secure, and accessible manner.
Everything from your expenses, contracts, invoices, and more, must be stored accurately and efficiently so that when the time comes to calculate returns, or in the case of any disputes, you have everything you need ready to go.
Keep Some Money Aside for Taxes
The last thing a freelancer wants is to get caught without the funds available to pay their tax returns.
This can be the case if you neglect saving and don’t have money set aside for this eventuality.
Unlike traditional employees, freelancers are responsible for their own taxes, and this can be a large chunk of annual income (around 25– 30% in some cases).
It is always a good idea to have a separate account in which you only deposit funds to pay your taxes. Then, with every payment, you can add this amount into the account knowing that when the time comes to pay your taxes, you have the finances ready to go.
Claim Business Expenses
Your tax returns shouldn’t always be feared.
In fact, if you deal with it in the right way, some great savings can be made. As a freelancer, you are technically the owner of a business, in this case, the business being yourself.
Therefore, some business expenses are applicable.
If you have to travel a long distance for jobs, are paying funds for marketing, or having client meetings, then you may be able to claim this back and not have to pay tax for it.
Keep Business and Personal Finances Separate
Something that is paramount is to ensure you are keeping your business and personal finances separate.
This way, when it comes to calculating earnings and your financial health as a freelancer, you will be able to see clearly your income, outgoings, and current figures.
You need to have a clear view of what is a business transaction, and what is a personal one, therefore doing it separately is a big help in this regard.
It also means you aren’t delving into finances that are intended for something else. For example, if you’re spending business money on personal items. This can lead to financial figures being skewed and can also be problematic for your business funding.
Consider Payments on Account
If your tax bill is over £1000, you may need to consider making payments on account.
These are payments in January and July that go towards the next year’s tax bill, and you must be aware that these are coming up and budget for them accordingly.
By following some of the steps above, such as always having money set aside for tax purposes, and also by staying on top of legislation, you will always be aware of how much you need to pay and be able to pay it in full and on time.
Consider a Retirement Fund
Something every person should always consider is retirement funding.
Paying into a pension pot is often done by the business that employs someone, but with freelancers, who work for themselves, it is much different.
Now, you may be thinking, why is this in a blog about taxes? Well, payments into a pension scheme can actually qualify for tax relief, making it another great deduction to know about.
Not only will this reduce your overall tax liability in the present, but it will also protect you in the future and help to provide you with a nice amount of money that you can use when retired.
Consult a Professional
Our final bit of advice if you are struggling to get your head around the complex world of tax returns is to speak to a professional.
In every situation, this is the best option.
A professional will not only handle your returns for you, but they can also seek out deductions which you may not notice, organise your records, and provide advice and peace of mind whenever it is needed.
Tax returns are important and should never be taken lightly, so if you are concerned, or if you simply want to make the most of your earnings, then this is always the most important bit of advice we can give.
Professional Tax Returns Advice for Freelancers from Blue Rocket Accounting
If you are a freelancer looking for a helping hand with your tax returns, then you’re in the right place.
Here at Blue Rocket Accounting, we have an experienced team of accountants who can take control of your finances and always achieve the best results possible for you.
Want to know more? Then get in touch with our team today.
