It’s no secret that doing your taxes can be incredibly difficult. In fact, in 2018, 80 percent of people made a mistake related to their taxes that affected their refund.
While taxes can be difficult for everyone, they can be especially difficult for those who work as freelancers. Filing taxes as a freelancer takes a lot more than just filling out a W4 form.
Check out this guide to discover the top tax tips for freelancers.
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Your job as a freelancer is to gather and report all of your income sources. If you’re like other freelancers, you likely have multiple income streams.
If you earn more than $400 per year, you’ll be responsible for paying taxes on your earnings. As a freelancer, you should be collecting a 1099 form from each client. If a client doesn’t issue a 1099 form, you need to find a different way to track your earnings. You can track your earnings using Google Sheets, or if your clients pay you via Paypal, you can track your earnings right through their website.
It’s important to understand that even if you only worked with a client once, you still need to report that income. Any income you don’t report could cause you to be penalized by the IRS.
In addition to paying regular income tax, freelancers are also responsible for paying self-employment tax at a rate of 15.3%. This tax covers Social Security and Medicare taxes that full-time and part-time employees normally have taken out of their paychecks automatically.
However, this amount also includes the employer and employee portion of the tax, since as a freelancer you’re considered both. Keep in mind that the self-employment tax is in addition to the regular income tax.
This is why it’s a good idea to set aside about 20 to 30 percent of your income in a separate savings account. This will prevent you from getting hit with a huge bill come tax time.
Just like everyone else, taxes for freelancers are due on April 15th. However, the IRS encourages freelancers to pay quarterly taxes. The quarterly tax due dates are April 15th, June 15th, September 15th, and January 15th.
While you can pay your taxes in one lump sum at the end of the year, paying quarterly taxes will allow you to avoid penalties and interest payments. Plus, paying quarterly taxes allows you to spread out your payments so you don’t have to pay a big amount all at once.
It’s important to understand that the quarterly payments you make are only based on estimates. Because you’re a freelancer, your income likely fluctuates throughout the year. If you underpay on your quarterly taxes throughout the year, you’ll just owe a little more money come April 15th.
If you overpay throughout the year, then you’ll be entitled to a small refund at the end of the tax year.
As a freelancer, you’re entitled to certain tax deductions. These tax deductions can help chip away at the total amount of income tax you owe at the end of the year, so you definitely want to look into them before filing.
Here are some things you can deduct from your taxes:
You can also deduct internet and phone bills, transaction fees, retirement contributions, research materials, membership dues, and insurance premiums. If you take classes to enhance your knowledge in the field or gain certifications, you can also write off those costs.
To file your taxes correctly, you also need to understand the structure of your business. Is it an LLC, an S-Corp, or a C-Corp? The legal structure of your business will determine how much you owe in taxes at the end of the year.
If you don’t have a legal structure set up for your business yet, consider doing it by the end of the year so you can take advantage of lower tax rates.
Keeping track of your invoices, figuring out your deductions, and deducing how much you owe can be very tough. For this reason, many freelancers choose to hire an accountant to help them with their taxes.
To find the right accountant, we suggest getting in touch with other freelancers you already know. If you don’t know anyone who can give you a personal recommendation, you can also look into the IRS directory.
Not only can an accountant help you with end-of-the-year tax preparation, but they can also help you with bookkeeping throughout the year. If you have a lot of money coming in, this can be especially helpful. You can also take advantage of these tax preparation services.
Now that you’ve read these tax tips for freelancers, it’s time to get started. With these tips, filing your taxes will be a breeze. Be sure to check back in with our blog for more tips on how to run your freelance business.
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