3 Signs You're Overpaying in Taxes as a Freelancer

Last April, I sat at my kitchen table staring at my tax software screen. The number at the bottom made my stomach drop: $16,400.

I'd made $92,000 that year—my best year yet as a freelance marketing consultant. But after taxes, health insurance, and business expenses, I was left with barely more take-home than when I had a corporate job making $65K.

Something felt wrong, but I couldn't figure out what.

Turns out, I was making the same mistake that 80% of freelancers make: I was structured as a sole proprietor. And it was costing me roughly $10,000 a year in unnecessary taxes.

Want to see if you're making the same mistake? Collective's free S-Corp savings calculator shows you exactly how much you could be saving based on your actual income. Takes 60 seconds.

If you're self-employed and making over $60K, chances are you're leaving thousands on the table too. Here are the three warning signs—and what to do about them.

‍

Sign #1: You're Paying Roughly 30-40% of Your Income in Taxes

The situation:

You invoice $80,000 for the year. After deducting legitimate business expenses, your profit is around $70,000. Come tax time, you owe somewhere between $20,000-$28,000 in total taxes (federal income tax + self-employment tax + state tax).

You think: "I guess that's just what self-employed people pay."

Why this is a red flag:

When you're a sole proprietor (which is what you are by default when you start freelancing), you pay self-employment tax on your entire net profit. That's 15.3% right off the top—before you even calculate federal income tax.

Here's the breakdown most freelancers don't see:

• Self-employment tax: 15.3% on $70K = $10,710
• Federal income tax: ~15-20% effective rate = $10,500-$14,000
• State tax: Varies, but let's say $3,000
• Total: $24,210 - $27,710

That self-employment tax alone is $10,710. And here's what most people don't know: there's a legitimate way to significantly reduce it.

What successful freelancers do differently:

They structure their business as an S-Corporation instead of operating as a sole proprietor.

With an S-Corp, you don't pay self-employment tax on your entire profit. Instead, you:

1. Pay yourself a reasonable salary (subject to regular payroll taxes)
2. Take the remaining profit as distributions (NOT subject to the 15.3% SE tax)

Real example:

Same $70K profit, S-Corp structure:

• Pay yourself a $45K salary (reasonable for your work)
• Take $25K as distributions
• You only pay SE tax on the $45K salary, not the full $70K
• Savings: ~$3,825/year just on that $25K

At higher incomes, the savings are even more dramatic. Make $100K in profit? You could save $8K-$12K annually.

According to Collective's member data, their members saved an average of $10,000 in taxes in 2022 by using this exact structure.

The catch:

S-Corps come with compliance requirements: payroll, separate tax filings, proper documentation. Most freelancers hear this and think "too complicated" and stick with sole prop.

That decision costs them thousands every single year.

The good news? You don't have to manage it yourself. Services like Collective handle the entire S-Corp setup, ongoing bookkeeping, payroll, and tax filings—so you get the savings without the complexity.

Calculate your specific savings here →

‍

Sign #2: You Get Hit with Surprise Tax Bills Every April

The situation:

You do your taxes in March. You thought you'd owe maybe $5,000. The actual number: $11,000.

You panic. You put it on a credit card. You promise yourself you'll "save better" next year.

Next year, same thing happens.

Why this keeps happening:

As a sole proprietor, nobody's withholding taxes from your income throughout the year. Unlike a W-2 employee where taxes come out of every paycheck, you get the full amount from clients.

That money sitting in your checking account? About 30-40% of it isn't actually yours—it belongs to the IRS and your state. But it doesn't feel that way when it's mixed with your actual take-home.

Most freelancers either:

• Don't pay quarterly estimated taxes at all
• Underpay because they're guessing at the amount
• Calculate it once in January and never adjust as income fluctuates

What you should be seeing instead:

With a proper financial setup, you should:

1. Know your quarterly tax obligation within a few hundred dollars
2. Get reminders before each deadline (April 15, June 15, Sept 15, Jan 15)
3. Never be surprised by your annual tax bill

How S-Corp structure helps:

When you run payroll through an S-Corp, taxes are withheld from your salary automatically—just like a regular job. This covers a big chunk of your tax obligation automatically.

For the distribution portion, you calculate quarterly payments on just that amount—which is smaller and more manageable.

Instead of: "I think I owe $8,000 this quarter?" You get: "Your Q1 payment is $3,200. Pay by April 15."

This is exactly what Collective members describe: they get an email each quarter with the exact amount to pay. No guessing, no surprises, no penalties.

The real cost of surprises:

Beyond the stress, surprise tax bills often mean:

• Underpayment penalties (typically $50-$500)
• Credit card interest if you can't pay in full
• Borrowing from business cash flow at the worst time
• General financial chaos that affects your whole life

Getting this handled properly is worth it for the sleep quality alone.

See how Collective handles quarterly taxes →

‍

Sign #3: You're Spending 5+ Hours Per Month on Financial Admin

The situation:

Sunday night. You finally sit down to "catch up on bookkeeping." You:

• Log into your bank account
• Export transactions to a spreadsheet (or try to remember which ones you already entered in QuickBooks)
• Categorize expenses
• Wonder if that lunch counts as a business meal
• Google "home office deduction percentage"
• Realize you forgot to save receipts for half your expenses
• Close your laptop in frustration
• Repeat next month

Between bookkeeping, invoicing, tax research, and general financial stress, you're spending 5-10 hours per month on this stuff. That's 60-120 hours per year.

Why this is actually a tax problem:

Most freelancers think this is just "the cost of doing business." But here's what's really happening:

When you're a sole proprietor with DIY finances:

• Your bookkeeping is probably inconsistent (gaps = missed deductions)
• You're not maximizing legitimate write-offs because you're not sure what's allowed
• You're probably not tracking mileage, home office use, or other valuable deductions
• Come tax time, you're scrambling to reconstruct the year

All of this leaves money on the table.

What the math actually looks like:

Let's say you bill at $75/hour. You spend 8 hours per month on financial admin (bookkeeping, taxes, research, stress).

That's 96 hours per year. At your rate, that's $7,200 in opportunity cost—billable hours you could be working instead.

Now add:

• Missed deductions from incomplete records: ~$1,000-$2,000
• Mistakes from doing it yourself: potentially more
• Mental energy and stress: priceless

The S-Corp advantage (when managed properly):

Here's what changes when you have both the right structure AND the right support:

Your monthly process becomes:

1. Upload bank/credit card statements (5 minutes)
2. Review any flagged transactions (5 minutes)
3. That's it

Everything else—categorization, reconciliation, payroll, quarterly estimates, tax filings—happens without you.

Your 8 hours per month becomes 20 minutes per month. That's 94 hours back per year.

At $75/hour, that's $7,050 in billable time returned to you—basically paying for the service that's also saving you $8K in taxes.

Collective member Morgan (a freelance designer) put it this way: "Tasks that used to take me hours each month now take just minutes. My taxes and bookkeeping are always ready on time, and my business saves thousands every year."

See what Collective handles for you →

‍

"But Isn't an S-Corp Complicated?"

This is the question that keeps most freelancers stuck as sole proprietors, overpaying taxes every year.

Yes, S-Corps have more requirements than sole props:

• You need to run payroll (at least for yourself)
• You file a separate business tax return (Form 1120-S)
• You need to maintain certain formalities
• Your bookkeeping needs to be cleaner

But here's what nobody tells you: You don't have to manage any of this yourself.

The reason successful freelancers use S-Corps isn't because they enjoy paperwork. It's because they've found services that handle all the complicated parts while they reap the savings.

Think about it: big companies have CFOs, accountants, and bookkeepers. Why? Because financial management is specialized work.

You're running a business. You just need the same infrastructure—sized for a business of one.

That's exactly what Collective was built for: S-Corp formation, bookkeeping, payroll, and tax filing—all managed for you, all in one flat monthly fee. You get the tax savings without becoming a tax expert.

‍

What Should You Actually Do?

If you recognized yourself in 2-3 of these signs, here's your action plan:

Step 1: Calculate your actual potential savings

Don't just take my word that you're overpaying. Run the numbers for your specific situation:

• What was your net profit last year?
• What did you pay in self-employment tax? (Look at your Schedule SE)
• Model what it would look like with an S-Corp structure

Use Collective's free calculator to see your specific savings →

It takes about 60 seconds and shows you exactly what you'd save based on your income. No email required, no commitment.

Step 2: Understand your options

You have three paths forward:

Option A: DIY S-Corp

• Form the S-Corp yourself (LegalZoom, etc.)
• Figure out payroll (Gusto, etc.)
• Manage your own bookkeeping (QuickBooks)
• File your own taxes (TurboTax + stress)
• Total cost: ~$1,500-$2,500/year in software and filing fees
• Time cost: Still spending hours on this monthly

Good for: People who enjoy this stuff or aren't busy enough yet

Option B: Traditional CPA + Bookkeeper

• Hire separate bookkeeper ($200-400/month)
• Annual CPA for taxes ($1,500-$3,000+)
• Coordinate between them yourself
• Still handle payroll separately
• Total cost: ~$4,000-$7,000/year
• You're still the project manager

Good for: People with complex situations or who want local relationships

Option C: All-in-one service (like Collective)

• S-Corp formation, bookkeeping, payroll, and tax filing in one
• Dedicated CPA team, flat monthly fee ($349/month or $296/month annual)
• Everything coordinated, nothing falls through cracks
• 100% accuracy guarantee (they pay penalties if they make mistakes)
• Total cost: ~$3,500-$4,200/year for full-service

Good for: People who want it handled correctly without becoming a financial expert

Learn more about Collective's services →

Step 3: Make the change (ideally by March 15 or start of next year)

S-Corp elections have timing rules:

• For current year: Generally need to file by March 15
• For next year: Anytime, takes effect January 1

If you're reading this after March 15, don't wait another full year. Start planning now for next tax year, or look into late election options.

Book a free consultation with Collective to discuss timing →

‍

The Real Cost of Waiting

Here's what haunts me about my own story:

I spent three years as a sole proprietor making $80K-$90K per year before I finally switched to an S-Corp.

Three years × $9,000 average savings = $27,000 I gave away because I thought S-Corps were "too complicated" or "not for someone my size."

I wasn't too small. I was exactly the right size. I was just structured wrong.

If you're making $60K+ as a freelancer and you recognized yourself in these three signs, you're probably in the same boat I was.

The question isn't whether you're overpaying—you almost certainly are.

The question is: how many more years will you let it continue?

‍

Ready to Stop Overpaying?

Here's what to do next:

1. Calculate your savings - See your specific numbers in 60 seconds
2. Book a free consultation - Talk to a tax advisor about your situation (no pressure, just information)
3. Read member stories - See what freelancers just like you experienced after switching

Collective serves thousands of self-employed professionals across all 50 states. They handle formation, bookkeeping, payroll, and taxes—so you can focus on your actual work.

Members saved an average of $10,000 in taxes last year. Plus they got back dozens of hours per month they used to spend on financial admin.

Get started with Collective →