Income Tax How can Freelancers manage their Income by Optimising Income Tax? Smart strategies for freelancers to manage their income effectively By Saagarika Gopinath – On December 11, 2024 9:55 am – 4 mins read Freelancers are usually paid directly by the clients, but they tend not to receive traditional employee benefits such as insurance or paid leave. Freelancers are responsible for their tax filings and may need to account for additional costs like tools, software, or workspace expenses. This form of income is prevalent in industries that prioritise flexibility, creativity, or specialized skills. Understanding Common Mode of Tax Evasion with Practical Scenarios, Click Here
What do you mean by freelance income? Freelance income can be defined as the earnings made by a person for providing services or completing projects on a contractual or per-assignment basis rather than being an employee of a company or an organization. Freelancers usually work independently, offering their expertise in areas like writing, graphic design, programming, consulting, or photography. This type of income is typically project-specific, meaning it varies based on the scope of work, agreed terms, and also assignment duration. The clients usually pay freelancers directly. Unlike salaried employment, freelance income is not fixed and depends on the freelancer’s ability to secure work and negotiate rates. It often involves managing multiple clients simultaneously and requires strong organizational and business skills. Understanding Common Mode of Tax Evasion with Practical Scenarios, Click Here
Strategies for managing income First and foremost things to note that you have to keep proper track of your income. And once you know how much income is earned for a particular term, you have to start tracking your expenses. After comparing your average income and expenses, create a budget that reflects these differences. When you are filing your taxes at the end of the year, it will be helpful to have all of your receipts.
Only if you keep frequent track of your business expenses may you claim a range of them on your taxes. Always keep your personal income and business expenses separate. It is always better to open a separate bank account for your business transactions. It is good to set aside money for both immediate and long-term savings. Understanding Common Mode of Tax Evasion with Practical Scenarios, Click Here Importance of tracking your expense As already mentioned, once you have an idea of the income earned by you for a specific period, then it is advised to keep track of your expenses. This is vital as once you monitor your income and expenses incurred, it is easy to manage your freelance income. Apart from fixed expenses such as rent, taxes, and insurance, you should also consider flexible expenses and aim to decrease them if possible. Tips to manage income with reference to Income Tax The main thing to note is to choose your tax regime and compare the old and new tax regimes in India and determine which one is more beneficial for you based on your deductions and exemptions.
Tax planning is very important in managing your finances. Tax planning simply involves the process of aiming the financial activities in such a way that minimizes the tax liability and helps save the income earned. It is mainly done to maximize after-tax income. Make sure you avail of all eligible deductions provided under the Income Tax Act, 1961, especially under Section 80 of the Income Tax Act,1961. Instead of filing your income tax returns ( ITR ) or goods and service tax ( GST ) returns on your own, it is preferable to hire a tax consultant or chartered accountant. In certain cases, it is better to file your returns quarterly, especially in cases where their total tax liability exceeds Rs. 10,000. Tax laws keep on changing, so always be updated with the latest tax laws and the reforms made in taxation so that you do not make major errors.
Always file your ITR on time so that you will not have to pay penalties or fines. If you fail to pay your advance tax, you will be charged interest under Sections 234B and 234C of the Income Tax Act. If you are opting for the presumptive taxation scheme under Section 44ADA, they can declare 50% of their gross receipts as income and avoid maintaining detailed books of accounts, provided their total income does not exceed Rs. 50 lakhs. GST is not applicable to freelancers if their total revenue remains below Rs. 20 lakhs in a financial year. Additionally, individuals providing goods or services with a turnover under the specified threshold may qualify for the composition scheme.
Exports and other zero-rated supplies are also exempt from GST obligations. Understanding Common Mode of Tax Evasion with Practical Scenarios, Click Here Benefits of proper record-keeping Proper record-keeping helps a freelancer ensure financial and operational efficiency. It helps to track income, expenses, and deadlines of their projects, thus making them plan for their finances more appropriately. It helps in smooth invoicing and easy payment tracking, thus lowering the risks of disputes with the client. Accurate documentation helps freelancers in tax deductions as they minimize liability. Good records also indicate business growth, allowing freelance workers to identify sources of profits and use time effectively.
Records such as contracts and correspondence secure the legal position in case of a dispute. This management will ensure long-term professionalism and credibility, leading to more clients and a reputation boost. Overall, record management helps to ensure smooth running, financial stability, and peace of mind. It is generally observed that people use the accrual method of accounting unless their receipts are unclear, or unexpected. The books of accounts must be kept up-to-date for income tax purposes, according to the Income Tax Act. It is to note that Section 44AA and Rule 6F of the income tax statute have mandated them. However, you are exempt from maintaining the books of accounts if your income or turnover falls below a certain threshold. Understanding Common Mode of Tax Evasion with Practical Scenarios, Click Here
Common mistakes and how to avoid them Common mistakes include not maintaining separate bank accounts for personal and business use. Many freelancers fail to file their returns on time. Most importantly, do not spend more than your income. Always take loans with low interest rates. A common error made by freelancers is that they do not maintain book of records. Thus, being a freelancer is not an easy job, it comes with a lot of responsibilities, as in the case of freelance income, it may not be stable like a salaried job. Always track your expenses and income and create a proper budget. Be aware of the latest tax laws and hire a tax professional if necessary.