No one looks forward to tax season, but tax payment and reporting burdens may be even greater than usual if you’re one of the approximately 16-million-strong independent workers in the country today.

Proper tracking of your business expenses, income, and tax payments are all key challenges facing "solopreneurs." Getting this right is also a critical factor in protecting your status as an independent business (both for you and the clients you serve) since we are in an environment of increased government scrutiny of worker misclassification.

The good news is that the following five tips can help independents maximize deductions, increase cash flow, and meet their responsibilities as compliant businesses:

1. Estimate to save. The No. 1 mistake that independent workers make is failing to plan for their full tax burden. Independent contractors must ensure that they account for self-employment tax in addition to income tax. Also, depending on where your services are delivered, you may find that additional local business taxes apply (like the B&O tax in Washington State or the Unincorporated Business Tax in New York City), so make sure you check the local tax rules of each city where you work and where you reside. Properly estimating taxes can reduce the end-of-year tax burden. In fact, prefunding all owed taxes is required if your federal tax liability is expected to be more than $1,000 (check local state tax rules as well). Failure to fund estimated quarterly taxes can result in an unplanned tax burden and may also include penalties for underpayment. Do your research or seek professional advice, and be sure to estimate your tax burden throughout the year. The actual amount of tax will change based on new projects and new expenses, but you should be able to calculate an estimated overall annual rate. Once you know your estimated annual tax rate, develop a good system that forces you to save for taxes to avoid being caught off guard. If you have trouble setting aside funds, consider opening a separate bank account for taxes, and each time you receive a client payment, deposit that percentage into this account.
2. Track and manage business expenses. Many independent workers miss important business deductions because they do not have a system, the advice, or a process in place to properly track and document them. In order to be deductible by IRS standards, the expense must be both “ordinary and necessary.” As ordinary expenses can vary by occupation, it is important to get educated about allowable deductions and put an organized system in place that lets you properly track and maintain the appropriate documentation throughout the year. Whether it’s a scanning tool, an Excel spreadsheet, or working with a service that keeps you organized, it’s important to be consistent year-round. Whatever your process, make sure you make it a habit. Submitting expenses and managing them shouldn’t be an annual chore but a daily routine for a one-person business.
3. Get familiar with per diem rates. If you have yourself set up as an employee of your company, you may be entitled to a per diem allowance when you travel a certain distance from home to conduct business. Provided you comply with the IRS rules (be sure you check with your tax professional) this can help reduce your tax burden when working on projects that require long-distance travel.
4. Get the most from your health benefits. You may be able to reduce your tax burden by taking maximum advantage of plans that can yield pretax benefits. For example, opening up a Health Savings Account (HSA) along with opting for a high-deductible (approximately $5,000) medical insurance plan can be a good idea. You can contribute funds into this HSA, and each dollar will offset your taxable income. For 2012, you can contribute up to $3,100 for an individual or $6250 for a family. As you pay for medical expenses to meet your deductible, they are taken from your HSA. If you do not use the funds, they will roll over, earning pretax interest, which then can be applied to future health care costs.
5. Fund your retirement. Independent workers have a number of options for retirement planning, including Simplified Employee Pensions, Individual Retirement Accounts, and Solo 401(k)s. If you can afford to save for retirement, then it makes sense to put a plan in place that allows you to save the maximum amount. If you have your own company, there are many easy ways to leverage your retirement plan that allow you to contribute up to $50,000 (and in some cases more) tax-free dollars, depending on the type of plan you choose (see your tax or financial advisor to find the best option). This is one of the best ways to build up your nest egg.

Taxes are a critical part of running your independent business. A little guidance, time, and planning can ensure that you are not only in compliance, but can also help you generate more cash flow. While these five tips can help, there’s good reason to turn to specialists if you are losing sleep, billable time, and income by trying to do it all yourself.