Tax time can be stressful for freelancers and small business owners. Unlike W2 employees, they don’t get a tax refund. Business tax filings typically create a liability. That can be somewhat offset by making regular quarterly deposits, but limited cash flow might make that difficult. Here are some tips on how to stay on top of this and other issues at tax time:
1. Understand Your Tax Obligations
Employers must make electronic tax deposits to cover withholdings. Federal tax deposits (FTDs) are made electronically using Form 941, which can be submitted every pay period, or Form 940 for quarterly deposits. Your state revenue department may also have reporting and deposit rules. Check with your accountant to find out what those are.
Freelancers receiving a Form 1099 at the end of the year are supposed to make quarterly deposits, but many do not. Failure to do so could result in penalties. You’ll also pay a self-employment tax of 7.65% in addition to your regular income tax, so it’s best to put aside 25% to 30% of each payment while you’re earning it.
2. Keep Accurate Records Year-Round
Tax time is an opportunity to review your records. Ideally, you’ll want them to be stored electronically in a platform like QuickBooks or Freshbooks. These accounting platforms record all transactions and even tell you how much you’ll need for quarterly deposits. They also integrate with other platforms that do expense management and payroll.
Accurate bookkeeping is essential for tax filings. You may need receipts for certain expenses, electronic records for transactions, and an official profit and loss (P&L) statement your accountant can use to calculate expenses. If you’re doing payroll, you’ll also need a report from your payroll company or internal records if you’re doing it in-house.
3. Separate Business and Personal Finances
Entrepreneurs and first-time business owners sometimes make the mistake of mixing their business and personal finances. This can create a bit of a mess during tax time. To avoid this, open a business checking account and apply for a business credit card. Creating a business entity like an LLC or C-Corp could also help you manage your money.
Separating your business income makes your venture a real company. That will be critical when the time comes to cut business costs, optimize revenue, or plan an expansion. The right corporate structure could also help you bring in investors or partners who can help grow your business into something that will build generational wealth.
4. Know Your Deductible Expenses
Sole proprietors and LLCs pay personal income tax. Incorporated small businesses may have another level of tax liability. Both can deduct certain expenses. Individuals can itemize those or take a standard deduction of $14,600 as an individual or $29,200 if married filing jointly. Deductible expenses for businesses are more complicated.
The IRS issues new rules on this every year. For instance, the deduction for research and experimental (R&E) expenses incurred after 2021 has been eliminated in 2025. It’s been replaced with a waiver for accounting method changes (Form 3115) that requires amortization instead of a straight deduction. Ask your accountant if this change affects your company.
5. Plan for Quarterly Estimated Taxes
The IRS has a “failure to pay” penalty on unpaid taxes. It’s calculated by assessing a charge of 0.5% of the unpaid balance for the first month. That goes up to 1% in month two, 1.5% in month three, etc. The maximum they can charge is 25%. It seems like a lot, but the bill goes up at the rate of 6% per year. Falling behind can be expensive.
Making quarterly deposits may be difficult for freelancers or small businesses, particularly when cash flow is tight. It’s best to look at these as an investment rather than an expense. Your company will be more profitable if you don’t need to pay the failure to pay penalty. You’ll also want to have all taxes paid in full to sell the firm or change business structures.
6. Leverage Tax-Advantaged Retirement Plans
The IRS annual contribution limit for participants in 401(k), 403(b), 457, and Thrift Savings Plans was increased to $23,500 this year, up from $23,000. These plans are tax-advantaged because contributions come out pre-tax. Maxing them out will lower your adjusted gross income and your tax liability. It can also lead to a more comfortable retirement.
Traditional IRA contribution levels still have a maximum limit of $7,000. For business owners, the limit for contributions to a simplified employee pension (SEP-IRA) plan is now $70,000 per year, not to exceed 20% of your net income. SEP-IRA contributions are tax deductible. Ask one of our accountants about how to set this up.
7. Stay on Top of Tax Law Changes
The waiver for accounting method changes isn’t the only change in the 2025 tax code. The standard rate for mileage deductions has increased from 67¢ per mile to 70¢ per mile. This sets a standard for businesses reimbursing employees and independent contractors using personal vehicles for work. It also affects depreciation for FAVR calculations.
The Internal Revenue Service has a news link on its website where it publishes tax law changes and other relevant information affecting individuals and small businesses. Other sites like Bloomberg and TurboTax also post tax news. You can research the rules on these websites or you can simply call our office to ask about new rules that affect your company.
8. Work with a Tax Professional
One of the easiest ways to stay on top of tax time is to hire a tax professional to do the work for you. The rules change every year and you are not in the business of keeping track of them. That doesn’t mean you’ll relinquish control of your internal finances. A tax professional handles specific tasks that require a more knowledgeable approach.
Our team of CPAs at D&M Accounting would be happy to assist you. We have decades of experience helping small businesses and freelancers understand their obligations, keep accurate records, and make quarterly deposits. We know which expenses are deductible and how new tax laws affect your business. Visit our website or call us today at 262-253-9955.
