Starting a freelance business can be as rewarding as climbing Mount Everest—or finding that lost sock in the laundry. While you’re elated to begin doing the work you love…if you’re not careful, that elation can turn to dread at tax time if you end up owing significant dollars in back taxes or worse, face an IRS audit. So what’s a freelancer or self-employed individual to do? Crawl under a rock and hide? No! How about checking out the following tips brought to you by the trusty CPA for Freelancers® team to help you start out on the right foot when establishing your business.

1) Explore your entity options. One of the first and the most important decisions that a self-employed individual must make is through what type of entity their business will operate. If you work with a tax professional to file your taxes this year and they suggest that you may be better off with a different entity type, don’t despair. You can always make a change—but you will want to have some professional help from a CPA in this area as there are several options to choose from, each special in their own way:

• A sole proprietorship is the simplest form of entity in terms of set-up and tax payments. As a sole proprietor you are responsible for claiming the profit and loss of the business as your income. You also must pay self-employment taxes. The drawback of a sole proprietorship is that the individual is personally liable for any damages or credit issues that arise from their business operations.

• A corporation is an entity which is separate from its owner. The corporation is formed under the laws of the state in which it is operating, with Articles of Incorporation. Choosing to establish a business as a corporation limits the liability of the individuals participating in it and, from a branding perspective, it may also provide additional credibility to the business.

• A subchapter-s corporation (or s-corp) is a corporation and the owners are considered employees. The entity is required to pay these employees a reasonable salary. Profit or losses of the entity flow through to the individual shareholders. Any salary paid is subject to traditional employer and employee payroll taxes. The remaining profit flows through to individual shareholders and, while subject to income tax, is not subject to payroll taxes and is considered passive income. In order to maximize the tax benefit of an s-corp, owners must find the balance between wages and profit distribution.

• A limited liability company (LLC) is not a corporation, but it has the liability protection of a corporation. Single-member LLC entities pay tax like a sole proprietorship. Multiple-member LLCs can also be formed which pay taxes like a partnership.

Equally as important as choosing the right type of entity is making sure your throw pillows are color-coordinated with your couch. In all seriousness, though, making sure that your business entity is set up correctly is what’s important—a step that can be confusing to individuals who have no experience in this area (such as almost everyone!).

2) Know your geographic tax obligations. Most individuals are aware that federal and state taxes must be paid (duh), yet they may underestimate how much is actually owed (whoops). The most common place for newly self-employed individuals to overlook their tax obligations is at the local tax level.

Business owners need to know what taxes they may be responsible for in the city where they are conducting business. This information can usually be found on the website of the city where a freelance business is based or by engaging a local CPA firm to help in the business start-up phase. Do not take the advice of your friend’s brother-in-law’s hairstylist who once dated an accountant. A tax professional will be able to advise on geographic-specific tax considerations that may not be apparent to those outside the tax profession.

3) Be prepared to track and pay taxes regularly. When you’re out on your own and self-employed, you must proactively pay tax on any income earned. You cannot sit around playing Super Mario and hope those taxes miraculously pay themselves. One of the most serious mistakes that a freelance business owner can make is failing to pay quarterly estimated taxes (including federal, state, and local personal and business related taxes) and, if your business has employees, not keeping up with payroll taxes.

It is extremely important for you, as a freelancer to organize your accounting as neatly as your sock drawer (or not as may be the case for some!). Keep detailed records of revenue and expenses and how much profit your business is making. This information is essential in order to make the appropriate estimated tax payments that are required of self-employed individuals. When estimated payments are not made on a regular basis, the amount of money owed to the IRS can add up quickly and become as burdensome—just like your sister’s three pages of instructions on how to feed her cat when she’s on vacation. In addition, if quarterly tax payments are not made, freelancers can be subject to IRS fines and penalties. And who wants that?

4) Get professional tax help if needed. As many seasoned freelance business owners will tell you, it can be difficult to focus on doing the work you love and that generates income while also keeping up on the tasks that will keep their business operations in good standing from a legal and tax perspective. If this is your first tax season as a freelancer

Keeping abreast of compliance—especially in the area of taxes where the rules are constantly changing—is vital. Many freelance professionals relieve themselves of the burden of tax planning and preparation by avoiding it and hiring a masseuse. Actually, they face it and hire a tax professional. Seeking the advice of a licensed CPA is also a good idea for those who are just starting out to ensure that they establish their freelance business correctly and avoid costly mistakes. For freelancers who go this route, it is imperative to select a competent accountant who is well-versed in the nuances of taxation specific to the self-employed.

When it comes to starting a freelancing business and setting up the proper legal and tax structures, the phrase ‘Disco Rules’ is particularly important. Wait. Wrong phrase. ‘Caveat Emptor’ is the phrase that is particularly appropriate. Often, the excitement of starting a new business can cause self-employed individuals to jump the gun when it comes to setting up a new entity under which to do their work, which can complicate tax issues further. So don’t rush into it…take time to avoid the tax booby traps we’ve discussed here.