Self-Employed Tax Basics

Self-employed tax rules differ by country and change often, so nobody should take figures from a web page as gospel. What does transfer across borders is the shape of the system: you register, you keep records, you claim allowable costs, you pay on a schedule that may include advance payments, and you keep the tax money separate from the money you spend. Learn that shape and the local numbers become a matter of filling in blanks with an accountant.

Register before you need to

Most countries require you to tell the tax authority that you have started trading once your income passes a small threshold, and some require it from the first invoice regardless. Missing the deadline usually triggers a penalty, and it is rarely waived because you were busy with client work. Ask your tax office, or an accountant, what the trigger is where you are and when the clock starts.

Registering as self-employed often means the tax authority issues a tax reference number, and clients may need that number before they can pay you. Some countries split the registration between tax and social insurance, so you may need to do two separate registrations. If you do nothing else this month, find out which registrations apply to you and complete them.

Keep records from the first day

Keep every invoice you send, every bank transaction, every receipt and every contract. Digital bookkeeping is far easier than a shoebox, and most countries require records to be kept for several years after the tax year ends, so deleting old files is a mistake. If you use accounting software, connect the bank feed, because manual entry is where errors and omissions creep in.

Note the difference between an invoice date, the date you receive payment, and the date your tax year ends. Depending on where you live, you may be taxed on what you invoiced or on what actually arrived, and getting this wrong shifts income between years. It matters most at the boundary: an invoice sent in March and paid in April could land in either year.

Costs you can usually claim

The general principle is that a cost is deductible if it was incurred wholly and exclusively for the business. That covers software, hardware, professional insurance, accountancy fees, bank charges on a business account, marketing spend, travel to client sites, and a proportion of home costs if you work from home. The proportion is where people go wrong, because it has to be reasonable and defensible, not the whole household bill.

Some countries allow simplified flat-rate deductions for home office or mileage instead of itemising receipts, which saves a lot of paperwork. Ask which method suits your situation. Also ask about anything you use for both work and personal life, such as a phone or a car, because the treatment varies and the rules change. Never claim something you cannot explain with a receipt or a clear business reason.

Payment timing, advance payments and set-asides

Many tax systems require self-employed people to pay in instalments during the year, based on the previous year's profit, rather than one lump at the end. That means a good year creates a larger bill the following year, and a freelancer who spent the money can find themselves in difficulty. Estimate your liability, divide it by the number of payment dates, and move that amount out of your current account on each invoice payment.

A separate tax account is the single most useful habit. Some people move a fixed percentage of every payment, others move a percentage that rises as income climbs. Either works if you are consistent. The point is that when the bill arrives, the money is already sitting there and you are not borrowing to pay tax.

Questions to put to an accountant

Accountants answer these quickly and charge far less than the cost of getting them wrong. The list is short and worth writing down before the call, because the answers depend on your country, your income level and the current year.

Bring your income estimate, your rough costs, your country and your plans for the next year, and ask whether you should be trading as a sole trader or through a company, whether you need to register for a consumption tax such as VAT or GST, how advance payments will work for you, what the penalties are if income drops and a payment is missed, and whether any of your work counts as employment for tax purposes. That last one catches freelancers whose main client behaves like an employer.

• Wholly and exclusively - The test most tax authorities apply to a business cost: spent for the business and nothing else.
• Advance payment - A part payment of next year's tax, collected during the current year based on prior profit.
• Set-aside - Money moved into a separate account the moment an invoice is paid, so the tax bill is funded in advance.
• Tax year - The fixed period the tax authority measures your income over, which often does not match the calendar year.