Tax Tips for Small Business Owners and Freelancers

Running your own business or freelancing offers freedom, flexibility, and the chance to pursue your passions—but it also comes with unique tax responsibilities. Unlike traditional employees, self-employed individuals and small business owners must track income, expenses, and deductions throughout the year. Mistakes can lead to missed deductions, underpaid taxes, or even penalties.

At Compass Tax Center, we help small business owners and freelancers navigate the complexities of tax season so they can maximize savings and minimize stress. Here are our top tax tips to keep you compliant and financially savvy.

1. Keep Accurate Records of All Income

Whether you’re a freelancer, contractor, or small business owner, tracking income is critical. The IRS requires reporting of all income, including cash, checks, credit card payments, and digital payments (like PayPal, Venmo, or Stripe).

💡 Tips for staying organized:

• Use accounting software like QuickBooks, FreshBooks, or Wave.  And mileage tracking software like Everlance, MileIQ, or Timeero

• Keep a separate business bank account to simplify tracking. Using your personal account often leads to missed expenses, and more taxes paid.

• Save invoices, receipts, and digital payment records.

Failing to report income—even accidentally—can trigger audits or penalties, so having detailed records is essential.

2. Understand and Claim Business Deductions

One of the biggest advantages of self-employment is the ability to deduct business expenses, reducing taxable income. Common deductions include:

• Home Office Deduction: If you use a space exclusively for work, you may deduct a portion of your rent, utilities, and internet.

• Equipment and Supplies: Computers, printers, office furniture, and software subscriptions.

• Travel and Mileage: Business-related travel, including client meetings and conferences. Track mileage with apps like MileIQ.

• Marketing and Advertising: Website hosting, ads, and promotional materials.

• Professional Services: Accountant, legal advice, and consulting fees.

💡 Tip: Keep receipts organized digitally or physically. Compass Tax Center can help determine which deductions are legitimate and how to calculate them correctly.

3. Plan for Self-Employment Taxes

Unlike W-2 employees, self-employed individuals pay both the employer and employee portions of Social Security and Medicare taxes (known as self-employment tax). In 2025, the self-employment tax rate is 15.3% on net earnings.

Quarterly Estimated Taxes

• To avoid penalties, freelancers and business owners often make quarterly estimated tax payments to the IRS.

• These payments cover both income and self-employment taxes.

• Compass Tax Center can calculate accurate quarterly payments so you avoid surprises at filing time.

💡 Tip: Set aside a percentage of your income (usually 20–25%) to cover taxes. This prevents scrambling when payments are due. And if you save more than you owe in tax you have some "fun money".

4. Retirement Planning and Tax Benefits

One often-overlooked advantage of being self-employed is the ability to contribute to tax-advantaged retirement accounts, which both reduce taxable income and prepare you for the future. Options include:

• SEP IRA: Easy to set up and allows high contribution limits (up to 25% of net earnings, max $66,000 in 2025).

• Solo 401(k): Allows employee deferral plus employer contribution.

• Traditional IRA or Roth IRA: Available to anyone, though income limits apply for Roth contributions.

💡 Tip: Contributing to retirement accounts can reduce taxable income while helping you build long-term savings. Compass can help you choose the right plan for your business structure.

5. Track Health Insurance and Other Personal Deductions

Self-employed individuals may also qualify for:

• Health Insurance Deduction: Premiums for yourself, spouse, and dependents can be deductible.

• Qualified Business Meals: 50% of meals for clients or business travel may be deductible.

• Education and Training: Courses and certifications that improve your skills can count as deductions.

💡 Tip: Keep all receipts and documentation—small expenses add up and may reduce your taxable income significantly.

6. Separate Business and Personal Expenses

Mixing personal and business spending is a common mistake. It complicates bookkeeping and increases audit risk.

💡 Best Practices:

• Use separate bank and credit card accounts.

• Track all transactions with accounting software.

• Reimburse personal expenses mistakenly charged to the business promptly.

Separating expenses ensures deductions are legitimate and your records are clear if the IRS ever audits your business.

7. Know Your Business Structure and Tax Implications

Your business structure affects your taxes, liability, and deductions. Common structures include:

• Sole Proprietorship: Simple, but you report business income on your personal return.

• LLC: Provides liability protection; can choose to be taxed as a sole proprietor, partnership, or S-Corp.

• S-Corporation: Can reduce self-employment taxes but requires more administrative work.

💡 Tip: Compass Tax Center can review your structure to ensure it aligns with your tax goals and financial growth.

8. Stay Up-to-Date on Tax Law Changes

Tax laws for small business owners and freelancers change frequently. For example, the Inflation Reduction Act introduced new energy credits for home office upgrades or renewable energy investments. Other updates may affect deductions for meals, travel, or retirement contributions.

💡 Tip: Working with a tax professional ensures you never miss new opportunities for savings.

Final Thoughts

Being self-employed is rewarding, but it comes with unique tax responsibilities. Keeping accurate records, planning for self-employment taxes, claiming every eligible deduction, and staying organized are essential for maximizing refunds and minimizing stress.

At Compass Tax Center, we specialize in helping small business owners and freelancers navigate these complexities. Our experts can help you:

• Identify deductions and credits you may be missing

• Prepare and file taxes accurately

• Plan for future growth while staying compliant

💼 Don’t let tax season overwhelm you. Let Compass Tax Center guide your business through tax season smoothly and confidently.

👉 Book your appointment today and take the stress out of self-employment taxes!