Whether you freelance full-time or on the side, once it earns you a certain amount of money, you owe the government a good portion of your hard-earned proceeds.

The good news is that you have options. You don’t need to give it all to them. You’re legally allowed to keep some of what would normally be theirs for the future you.

It’s actually rather simple.

As the money piles up

At the end of the year when you’re pulling together your 1099 MISC forms showing the bazillions of dollars that you earned for your craft, the realization sets in that you can’t keep it all. The IRS is legally entitled to a big ‘ol chunk. You have to give them some, but less than you might think.

To cover income tax, self-employment tax, and state income tax if it applies, you should plan on setting aside 20% to 35% of the amount you earn.

If you saw those two numbers and hope for the lower end, you’re not alone.

If you saw the higher and became instantly concerned, ditto.

Before the hyperventilation starts to get the better of you, keep in mind that you can easily and legally knock down the amount of what those percentages equate to in dollar amounts.

Reduce your tax burden

First, have a conversation with your accountant about all of the wonderful deductions that you can take that pertain to your freelance business. You’ll be amazed at what you can legally deduct as a business expense that will reduce the amount of tax that you’ll owe.

Yes, I said accountant. They’re not as expensive as you might think. They also know things about tax law that you and I probably don’t. Whatever they charge you, they can easily save in what you end up paying for taxes each year. Plus, tax preparation isn’t fun, unless you’re an accountant.

Second, take advantage of retirement account(s). Being self-employed doesn’t prevent you from participating in these IRS-sanctioned tax shelters.

The Internal Revenue Service sets the contribution allowances for retirement plans like a 401k or an Individual Retirement Account (IRA).

According to the IRS website, for 2023, the annual limit for IRA contributions is $6,500 and increases to $7,500 for those 50 and over. The maximum 401k contribution is $22,500 and increases to $30,000 for those 50 and over.

Let’s quickly discuss these two retirement accounts as they pertain to you as a freelancer.

An IRA account can be opened at credit unions, banks, online via brokers, and through companies that offer financial planning. For those that fall in the 24% income tax bracket, contributing $6,500 toward an IRA would equal slightly more than $1,500 off your tax bill.

The potential to pay even less in taxes

If you freelance part-time and have a full-time gig that offers a 401k plan, there’s some good news.

If you’ve been hesitant to contribute to it or increase your contribution, this might be a good way to shelter a bunch of that extra income so that you can tap into it when you retire.

Up to the maximum allowed, the amount that you contribute reduces your taxable income amount dollar for dollar. For instance, if you earn a total of $60,000 between your full-time job and your freelance side hustle and contribute $20,000 toward your 401k, your taxable income becomes $40,000.

Of course, that‘s $40,000 before you and your accountant determine all of the deductions for your self-employment endeavor which can knock it down even more.

Keep your money

The best part is that those contributions are yours to keep and begin tapping into without penalties once you reach retirement age. The amount of annual return your retirement account earns depends on your investment choices and strategy.

Your options aren’t limited to a 401k or IRA. There are more available as well that you can research or speak to your accountant or financial planner about.

The important thing is to understand that depending on your situation, you are allowed keep a substantial amount of the money that you earn as a freelancer without handing it over to the IRS in the form of taxes.

You can’t just start spending it now without penalties, but your future self will thank you in the years to come.

This article is for informational purposes only, it should not be considered financial, tax or legal advice. Consult a financial professional before making any major financial decisions.