Freelancing is the most lucrative
career line to be continuously growing around the globe. It provides professionals
with an independent lifestyle, sets a schedule, and executes multiple projects.
The gig economy is booming in nations like India; hence, freelancing is no
longer an alternative career but a mainstream alternative for the majority.
Of course, with great freedom
comes much accountability, especially in terms of money and taxes. Compare this
to the old model employee-whose employer handles his taxes-to learn what's
expected of him in relation to his own independent work. Unless he plans well,
many fall victim to some common tax problems with heavy fees and audits as
consequences, aside from the financial stress they bring upon.
To succeed in the tax landscape,
a freelancer must be knowledgeable about tax laws, manage finances
appropriately, and be proactive in filing taxes. Several problems are
available, and many more risks exist, such as income being misclassified or
important business expense deductions not recognized. Once these have been
avoided, the freelancer would be free to focus on business growth, with the
stigma of surprise tax liabilities erased from their business. In This blog will
attempt to walk you step by step through most probably the tax mistakes
freelancers make, giving some examples and some practical advice on how to
avoid them. Whether an amateur or an expert freelancer, knowing how to handle
taxes well is inevitable for being financially fit and for staying in line with
the law.
Of course, it includes handling
advance tax payments, GST registration return filling, and maximizing your
deductions-all this will give you info such that you know whether you are on
top of your freelance tax obligations or not.
Misclassification of Income
Almost all freelancers commit a
major mistake. Any and every amount earned through freelancing should be
reported under the head "Profits and Gains from Business and
Profession." That means you cannot treat it as personal income or
miscellaneous income. So, all your freelancing income in India will fall under
the head "Profits and Gains from Business and Profession," and
failure to classify it rightly may attract penalties.
Example:
Mr. X, an Indian graphic
designer, earned ₹25 lakhs of freelance services throughout the year. He
treated it as personal income rather than reporting it as "business
income." It is at the time of audit when the tax people found this kind of
underreporting. Result: This had him pay back-taxes and penalties for a little checked
business income reporting practice.
How to Avoid This Problem
While filing the tax return form,
one should choose a business or professional category. All payments from Indian
and international clients should be retained for records, even if he doubts the
classification and consult a tax advisor.
Failure to Pay Taxes
Unlike the employed-the tax is
deducted at source by the employers-those offering freelancing services have to
book for taxes separately. Many tend to spend the whole money earned and do not
reserve some cash back for taxing some amount owed later during the taxing
period.
Example:
Ms. Y is a content writer who
brings in an amount of ₹12 lakhs in a single year from her freelance work. She
was not saving any money for taxes. So when the financial year closed, the tax
bill shocked her to add another ₹1.8 lakhs. She didn't have any money saved up
which caused distress when she couldn't pay on time and then on extra penalties
and interest for late payments.
How to Avoid This Trap
Save a percentage of the income
received as tax every time you get your pay check. In India, if your estimated
liability towards tax exceeds ₹10,000, you are bound to pay advance taxes
quarterly. An estimate of your tax liability and payment of tax every quarter
reduces the burden at the end of the financial year and saves on interest on
late payments.
Overlooked Business Expenses
Freelancers forget, sometimes
that they can take off part of their business expenses from their taxable
income. Not making this deduction leaves you overpaying tax than you should.
Office supplies, travelling, internet charges, amongst others; are
business-related and hence deductible. You even take off part of home rent if
part of your home is used as an office.
Example:
Mrs. Z is an independent
photographer. She incurred equipment, travel, and software expenditure of ₹ 3
lakhs. Had she understood how it works, expenses would have been allowed to
her. That is why she paid ₹ 90,000 extra in taxes that she should have not paid.
How to Avoid This Problem
Proper and accurate
record-keeping of income received and all expenditures incurred while doing
your freelancing work. Save all those receipts, work contract, invoices, bank
statements and other documents relating to your freelancing business. In India,
keep track of which expenses are covered under the Income Tax Act and learn how
to take maximum deductions legally.
The Non-registration of Goods and Service Tax Act
In India, for a freelancer,
providing services under GST registration is compulsory if their annual income
would cross ₹20 lakhs ₹10 Lakhs for north eastern states. Mostly freelancers
overlook it and end up paying fines as well as penalties.
Example:
Mr. A is a software developer by
profession, who earned ₹22 lakhs in one year without getting himself registered
under GST. But when a big client asked for a GST invoice, he came to know of
the mistake he did. He could not get registered in due time and so faced
penalties as well as backdated GST with interest.
Ways of Not Falling into This Trap
Properly track your income and
apply for registration under GST if the income exceeds the threshold. You will
mandatorily be required to file GST returns and pay tax on it once you get
registered under GST. Though your income is below the threshold, registration
under GST will help you claim Input Tax Credit relating to the expenses
incurred by you in your business.
Deficient Book Keeping Account
Financial record hardly ever gets
maintained correctly, since most freelancers work directly through the bank
statements and eventually end up missing a few of the deductions and
misreporting and, in addition, maybe even legal trouble if audited.
Example:
Mr. B is a freelancer and did not
keep proper financial records and further had a problem in keeping apart
expenses as personal versus business income. Therefore, many deductions due to
the business-related expenses were missed, which put him overpaying on his taxes.
How to Avoid This Pitfall
Continue using accounting
software or a manual ledger that keeps track of income and expenses. It will
update the records and review it before filing taxes. Even freelancers in India
can maintain books of accounts under the Income Tax Act if their income exceeds
specified limits. One will get proper records while filing taxes.
Not Knowing One's Tax Deadline
Freelancers who normally delay
submission forget to file advance taxes or even submit their final tax return,
which leads them to face penalty and interest charges while waiting for the tax
season.
How Not to Make This Mistake
Put All Important Tax Dates on a
Calendar Advance tax filings in India are quarterly, but most states require
final tax returns to be made by July 31 with those needing auditions by October
31. GST tax payments will be due on a return for either monthly or quarterly.
Keep reminders and schedule time so you never forget a deadline.
Failure to Engage a Tax Professional
Freelancers may manage to save
some few coins by preparing their taxes. This is very costly as a process if
one is not well conversant with the tax laws. An accountant will ensure compliance
though while saving money through the full application of all the available
deductibles.
Example:
A freelance web designer, Ms C
prepared all her taxes herself. She didn't take any professional advice.
Therefore, she allowed some of the deductions for the cost of her businesses to
slip through. A tax consultant improved this for her and saved her quite a sum
of money the next year.
Avoid It
Seek a professional tax
consultant to prepare the tax return, particularly in the initial years of
freelancing. That way, the possibility of error will be minimized and you'd
stay on the right road for long-term financial well-being. Freelancers in India
may seek a CA or professional taxation lawyer with expertise in freelance
taxation.
Failure to Report International Income
That is why you should report
such international client income correctly. Most freelancers have a misplaced
notion that foreign income is not taxable in their host countries. In India,
all your global income, if you happen to be a resident, is actually taxable,
and failure to declare it will expose you to some pretty serious consequences.
Example:
Ms. D is a freelancer who stays
in Mumbai and received $30,000 from US clients. She did not declare this amount
in her tax returns she filed with the Indian Tax authorities. Due to the
omission of tax, she was taxed for tax evasion.
Avoiding The Pit
Report all foreign and Indian
earnings. In this section, you will identify particular tax treaties; namely,
those incorporating India and other countries for avoiding double taxes-an
obvious topic under Double Taxation Avoidance Agreements or DTAA. Tax
professional can keep you in the loop with the global reporting requirement.
Final Comments
Freelancers should, therefore, be
proactive in managing taxes to avoid legal cases and unnecessary financial
burdens. Keeping adequate tax records, having knowledge of the applicable tax
laws, preparation as well as getting professional advice can legally help avoid
many tax mishaps and protect hard-earned income. One must always remain
prepared and informed of any changes in tax regulations; hence, panic must not
strike during any tax season.
