The basics of tax planning for self-employed persons begins with understanding how they are taxed in the first place, which is substantially different compared to how an employee is taxed. Independent contractors are taxed on their net self-employment income (that is, net after various business expenses have been deducted from their gross business revenues). Independent contractors have two separate federal taxes applied against their net income: the income tax and the self-employment tax. Also, self-employed persons generally do not have taxes deducted from their pay (unlike employees), and so need to remit tax payments periodically throughout the year in the form of estimated taxes. A typical tax planning strategy for freelancers begins by keeping track of income and expenses, calculating estimated taxes, and then making any financial decisions that might reduce taxes to a desired level. Financial decisions which seem to have the most impact on tax planning for freelancers are picking a retirement plan for themselves and optimizing depreciation deductions.
The rest of this article discusses:
Getting Organized and Record Keeping
Home Office Deductions & Depreciation Strategies
Reporting Your Net Profit & Paying Your Taxes
What to Do if You have Business Losses