Tax took me a while to understand (and I still don’t really get it 75% of the time), but I’ve managed to gather some useful insights into tax as a freelancer, which I’ve compiled into this short guide.

I will just say this before we get started:

1. Hiring a tax professional is the one the most valuable business expenses I have! It saves me so much time, stress, and confusion.

2. That being said, even with hiring a tax professional, it is still incredibly valuable to understand the basics I cover in this intro. It helps you asks the important questions, and keep helpful tax practices in mind throughout the year, which makes your annual tax return much much easier.

Important note: This is extremely difficult to write, since tax law varies by country. So, this is very generalised and should be treated as a way to become aware of the kinds of things you might want to look into with regard to your business in your country. And always consult a tax professional for specific guidance.

Another important note: What is not covered in this intro guide is tax for people who work while travelling through multiple countries, or people who operate business in multiple countries. Different tax laws can apply when you have a registered tax number in two or more different countries. This required more in-depth research specific to your context.

Steps we’ll outline in this intro guide:

Step 1: Figure out your tax category, so you know how to properly register yourself into that category, and what tax returns you actually need to file.

Step 2: Understand what your tax return actually entails, how best to do it, and when.

Step 3: Set yourself up with the know-how on best practices, the right tax tools, and the right tax routines.

Step 1: Figuring out your tax category

Each tax category comes with its unique requirements and benefits. The right one for you aligns with how much risk you're willing to take, and how much effort you're ready to put into managing your business's legal and financial side.

Here are the main options (again, might vary by country), looking at what each is, their pros and cons, and when they might be the right choice for you - including the paperwork involved:

1. Sole Proprietorship

(I use this one)1

• What it is: Just you running your business. No legal distinction between personal and business finances.

• Pros: Easy to set up and manage. Fewer forms to fill out.

• Cons: Your personal assets (like your home) could be at risk if your business is sued.

• Paperwork: Only your personal tax return with an added section for business earnings.

• Registration: Often, no formal registration needed. You might need a business license, depending on your type of work and location.

• Right for you when: You’re starting or have a small, low-risk business and want to keep things simple.

2. Limited Liability Company (LLC)

• What it is: A legal structure that separates your personal assets from your business.

• Pros: Protects your personal property from business debts and legal issues.

• Cons: More paperwork and some cost to set up.

• Paperwork: A bit more complex, with separate filings for business, and extra if you have employees.

• Registration: File articles of organization with your state or local government and pay a filing fee. The specifics can vary by location.

• Right for you when: Your business is growing and you want extra protection for your personal assets. LLC’s also mean you can claim legal ownership of your business’s trading name.

Pro tip: If you want to claim your business’s name, but still want to run your business as a Sole Proprietor, you might be able to register an LLC and simply let it operate as a Shelf Corporation. Then, you only need to file your Sole Proprietor return, plus a Zero Return (ie. a return where you made no income) for your LLC every year. However, double-check this with your local tax authority.

3. S-Corporation

• What it is: A more advanced structure that can offer tax benefits for higher earnings.

• Pros: Potential savings on self-employment taxes.

• Cons: More rules and paperwork, including paying yourself a reasonable salary.

• Paperwork: Several tax filings, including corporate, payroll, and personal.

• Registration: More complex; involves filing Articles of Incorporation, obtaining an Employer Identification Number (EIN), and possibly more, depending on your location.

• Right for you when: Your business is thriving and you're looking for tax savings at the cost of more paperwork.

Step 2: What your tax return actually entails

Each freelance tax category has its own set of rules for tax returns. While the specifics can vary by country, there are some general patterns to be aware of. Let’s explore what tax returns might look like for each structure, what records you need to keep, and a rough timeline for filing.

General notes across all structures:

• Provisional Tax Filings: Some countries require provisional tax filings for businesses, which are essentially advance payments towards your expected tax bill. This is common in places like South Africa but can vary in other regions.

• Record-keeping: Whatever your category, maintaining a comprehensive and clear record of your expenses really really helps you with your tax return record, as well as making sure you claim back in business expenses what you’re owed.

1. Sole Proprietorship

• Tax Return Overview: Usually, you report your business income and expenses on a schedule that's part of your personal income tax return.

• Record-keeping: Keep track of all business-related income and expenses. This includes invoices, receipts for purchases, bank statements, and records of any business-related travel.

• Filing Timeline: Generally aligns with personal tax return deadlines. In some countries, like South Africa, you may need to file a provisional tax return mid-year and an annual return at the end of the tax year.

2. Limited Liability Company (LLC)

• Tax Return Overview: Depending on your country and the specifics of your LLC, you might file as part of your personal tax return or through a separate business return. It's more detailed than a sole proprietorship.

• Record-keeping: Similar to a sole proprietorship but with added emphasis on maintaining a clear separation between personal and business finances. Detailed records of all business transactions are crucial.

• Filing Timeline: Often coincides with standard business tax filing deadlines. Some regions might require periodic filings throughout the year, especially if you have employees.

3. S-Corporation

• Tax Return Overview: Involves filing a separate corporate tax return. This includes reporting income, expenses, dividends, and salaries paid to employees (including yourself).

• Record-keeping: Requires meticulous record-keeping for all corporate transactions, payroll details, shareholder distributions, and any other financial movements.

• Filing Timeline: Typically has a set corporate tax filing deadline, which may differ from personal tax deadlines. Additional filings throughout the year are common, especially for payroll taxes.

Step 3: Best practices, tools, and routines for tax success

Armed with knowledge of your tax category, the next step is to set yourself up for success with the right practices, tools, and routines. These are universal in their usefulness, regardless of your specific tax structure.

Best practices for all freelancers:

1. Keep impeccable records

Regardless of your tax category, maintain detailed records of all income, expenses, receipts, and invoices. Accurate record-keeping is essential.

• Go digital: For all paper receipts you keep (in-store shopping, restaurants, etc.), take photos of them and save them to a folder on your drive, organised by month.

• Create a dedicated mailbox folder: When you get emailed a receipt or invoice (flight payments, subcontractor invoices, Zoom receipt, etc.), move them into a special mailbox so they all live in one place. You can even set up automatic mailbox rules that filter emails from specific addresses (e.g. [email protected]) into your expenses folder.

• Document invoices: I keep all my client invoices in a special invoice folder on my computer, organised by financial year, AS WELL AS write them all into a GoogleSheet with custom formulas. This helps me see at a glance which invoices have been settled, how much I’ve earned, and how much tax I (approximately) owe.

2. Understand your deductions

Be aware of the expenses you can deduct2 — such as home office costs, travel, equipment, and software. These vary, so tailor your understanding to your business.

Also, you’ll have more luck claiming back deductions if you do #1 above really well!

3. Stay informed

Tax laws are constantly evolving. Keep abreast of changes, especially those affecting freelancers. Consider scheduling a 30min research session every 6 months, just to make sure you’re informed about the latest updates.

Useful tax tools:

• Accounting software: Options like QuickBooks, FreshBooks, or Xero help track income and expenses, manage receipts, and simplify tax filing.

• Receipt tracking apps: Digitise your receipts to avoid paper clutter and ensure you don't lose important documentation. Zoho has this functionality built-in for free, but an easy way to do this is just to take photos of paper receipts and add them to a designated folder or drive!

• Spreadsheet savvy: A well-maintained spreadsheet can be effective for those who prefer a more hands-on approach. Here are tons of free templates you can download and tweak.

Helpful tax routines:

• Regular financial reviews: Conduct weekly or monthly financial check-ins to avoid surprises at the end of the year. Schedule in 30min on a Friday to document your receipts, expenses, and income from that week. It’s as simple as that, and saves you loads of pain down-the-line.

• Set aside tax money: This is particularly important for sole proprietors and LLCs. Consider a separate account for tax savings, so that you’re only spending what you actually have.

• Plan for deadlines: Be aware of your filing deadlines and prepare in advance. If your structure requires estimated tax payments, like provisional tax, ensure you’re on top of those dates.

Closing thoughts

Tax is never fun. Don’t pretend it ever might be.

I gave up trying to gamify tax ages ago, and it helps me just do it and get it out the way without the disappointing feeling of “why isn’t this fun yet?!”

As I said a number of times: Always consider hiring a tax professional. I hire one twice a year, which I means I only pay them when I need them, and it really takes a ton of stress and hassle away from me.

:)