How freelancers are losing money due to complex tax process
As layoffs show no sign of easing off, more and more freelancers are hitting the market. But one thing they’re not prepared for: just how complex the U.S. tax process is for self-employed. And many of them are leaving money on the table as a result.
While there are some upsides: 41% of more than 500 self-employed workers said they make more money than they did at a permanent job, 81% believe the current tax system works against them, according to a recent study from Found, a business banking company geared for the self-employed. And a further 77% say they don’t understand how to maximize potential deductions – like retirement contributions or charitable donations – and write-offs, like business travel expenses or office expenses – which means they’re losing out financially.
“It shouldn’t be so hard to know what to deduct, how do I deduct it, and it shouldn’t be an expensive, time consuming process to file your taxes either,” said Nick Adler, Found’s COO. “Tax code keeps getting more and more complicated, not less and less. I don’t have much faith that the government will make this much easier for self-employed people.”
The number of people likely to be affected by this has swelled over the last year. As of 2022, there are 70.4 million freelancers in the U.S. And that won’t have accounted for the influx of recent layoffs to the self-employed market. By 2028, there will be more than 90 million freelancers in the U.S., Statista has estimated.
And yet, while forming a huge proportion of the workforce, these workers represent some of the most underserved segments of the U.S. economy. Freelancers say that the government has continuously fallen short in making it easier for them to navigate the complex systems and paperwork that being self-employed entails.
Maura Fallon, a freelancer working in the film making and creative industries, said it took her eight hours to file her taxes this year, using software TurboTax. “The biggest struggle has been setting aside enough money throughout the year to pay my taxes. Next to that struggle, is how much paperwork there is to deal with,” she said. “If I just worked a job that regularly took taxes out, it wouldn’t be as stressful,” she added.
It’s true that freelancers can take advantage of the available paid resources to help them navigate these systems, but if you’re a newer freelancer, you might not have the means to do so. Fallon said TurboTax helped her identify what she was and wasn’t able to deduct, but using the service did cost her $239.
Naturally, there are major benefits that come with being self-employed. Not having a boss to answer to is one of them, although that can quickly be replaced with difficult clients. But others may do it out of a passion for a certain field, and won’t realize just how stressful it is until they’ve made the jump, said Adler.
Fallon said she felt that stress in April, when it got down to the wire to file her tax return before the deadline. But being able to make deductions helped. “That’s one pro of freelancing,” said Fallon. “I can write a lot of things off because I am my own business.”
However, she doesn’t have two separate business and personal bank accounts– something Adler highly recommends.
“It’s a simple first step people can take,” said Adler. “It sounds trivial, but just having two separate accounts makes it so much easier to see all of the expenses associated with freelancing, self-employment of my 1099 gig job. Folks that don’t do that tend to miss deductions and are just giving money to the government that they don’t actually owe because the tracking of everything gets messy.”
Fallon may have missed writing some things off. Additionally, she couldn’t write off anything she paid for in cash because she didn’t have the receipts. It’s something that she didn’t think about earlier as it was her first year filing as a freelancer.
“Now I’ve learned that I should get a folder and notebook and keep every single thing documented,” said Fallon. “I will probably also open a business account.”
It’s not just the U.S. that has an overly complex tax return process. Cat Burchmore, based in the U.K., has been a freelancer for over 10 years and says that there are still significant challenges that she faces and has to pay a significant cost for her accountant to make sure everything is watertight.
“The whole tax system for freelancers and solopreneurs is just a complete minefield,” said Burchmore. “I have struggled with it for many years and it’s not until I have finally got my recent account as of January this year that I finally have an understanding of it all.”
Being more on the creative side, she says that her mind doesn’t understand accounts and numbers, which is what makes it an especially difficult task. With freelancers largely being in the more creative sector, she knows that she’s not alone in the daunting task of figuring out her taxes.
Burchmore worked with a freelance copywriter recently who was especially overwhelmed with figuring it out and didn’t even know that the first step was invoicing Burchmore so she could pay her. “She has no idea what she’s doing,” said Burchmore. “She’s asking me for help, and I’m not really the one who should be helping her with all of this, but there just isn’t that information out there. There is no easy way to find it.”
Burchmore is concerned that the complex system will deter people from freelancing.
“There’s just not enough support, especially when it could be such a great opportunity for so many people,” said Burchmore. “I think a lot of people end up thinking employment is a better solution for them, purely because they can’t cope with the taxes, when actually it might not be.”
Burchmore’s accountant, Racheal Layton of Layton Business Solutions, tries to provide some of that support.
“I like to empower freelancers with knowledge and teach them that they can do anything they want including file their taxes without being overwhelmed,” said Layton.
Alongside Adler’s recommendation to set up a separate bank account, Layton advises to think about tax returns on every expenditure.
“One missed receipt could make a huge impact on the tax return,” said Layton. “That’s why the biggest challenge is not tracking your finances, after all we can’t measure what isn’t tracked, it’s just guess work. By tracking money in and out of the business we can plan for business growth, achieve higher goals and facilitate bigger contracts.”