Filing taxes as a freelancer can be a pitfall of working for yourself. Many people join the world of freelancing for the freedom of being their own bosses. You choose your own hours, who you work with, and how much you charge.
However, freelancing also comes with its own set of challenges. The top challenge cited by freelancers is still doing their taxes.
Taxes for freelancers aren’t as simple as submitting a few documents. You don’t have an employer to claim how much you got paid. You are responsible for claiming both the employee and employer roles. So if you’re a freelancer, here are five tips that can help you out.
Filing Taxes as a Freelancer: 5 Helpful Tips You Need to Know
If this is your first tax season as a freelancer, take a deep breath. It’s not as complicated as you think, but there are some things you need to know. Keep reading for the top five tips:
1) Know About All Possible Deductions
There are expenses in every freelancer’s life that contribute to their business. However, not all expenses can be deducted on your taxes. The general rule is that the expense must clearly contribute to your business earning money.
What kinds of expenses does that include?
For one: your phone bill. If you use it to call clients and have telephone meetings, you can claim a percentage of your phone bill each month.
The same goes for your home internet bill if you work from home.
Here are some other common freelancer deductions:
- Gas and vehicle payments
- Office supplies
- Computer equipment and software
- Administrative costs
- Advertising and marketing
If you work from home, you can also claim the square footage of your workspace. However, you must be able to prove that it is where you primarily do your work. If you also rent a desk at a co-working space, you might not be able to claim your home office.
Ultimately, there are many deductions that freelancers often forget to claim. That’s why working with a trained tax professional who knows about them all is important.
Most tax professionals will suggest you save anywhere from 25-30 percent of your business income for taxes. Why is that percentage so high?
As a freelancer, you are the employee and the employer.
- First, you must pay self-employment tax which covers your social security taxes. It is currently 15.3 percent.
- Second, you must pay federal income taxes and state income taxes. These taxes are usually held by your employer and paid directly to the state or federal government. However, as your own boss, you need to deduct them for yourself.
It’s common for the first few years of freelancing to be tricky financially. You might not save enough and then end up owing quite a bit.
As you perfect your business practices, you’ll learn ways to save for taxes every month. Then, you can even choose to pay them monthly, quarterly, or annually.
3) Track Your Income and Spending
How do you know how much 25 percent of your earned income is? By keeping detailed records of all your business expenses and income, as well as your personal expenses and income.
This is a common struggle for first-time freelancers.
So, it’s best to get separate:
- business accounts, and
- personal bank accounts
This separates income that you can spend personally and income that stays in your business.
Every time a client pays an invoice, you need to deduct a certain amount for taxes. It may help to have a separate savings account for your business where you park this money.
Remember to keep receipts from every business expense you pay for. Today, many online bookkeeping software programs make it easy to scan physical receipts. Store everything digitally in an organized folder. Organization will be your best friend as a freelancer.
4) Know Your Tax Forms
Whether you do your taxes yourself or a tax professional does them for you, there are certain forms you need to be aware of.
The first form you need to be familiar with is a W-9
This is a document your client may ask you to complete to ensure they have the correct information from your business. It will include your business name, address, and taxpayer ID.
The second form is the 1099-MISC
If you earned more than $600 from a client, they are required to submit this form to the IRS. Similarly, if you hired sub-contractors for your business and paid them more than $600, you’ll have to submit one as well.
Attached to your individual tax return could be Schedule C and Schedule SE forms
- Schedule C forms report your business’s income if you’re a sole proprietorship or an LLC.
- Schedule SE forms report how much you’re paying in self-employment tax if you’ve made over $400 in the calendar year.
The final form to get familiar with is the 1040-ES.
This form calculates the amount you’d owe quarterly in business taxes should you make more than $1000 in the calendar year.
5) Hire a Tax Professional
You can start filing taxes as a freelancer on your own. However, if the information so far has confused you, there’s an easy solution. Hire a tax pro who is knowledgeable on taxes for freelancers.
They will have a strong grip on:
- forms, and
- giving you advice on bookkeeping.
Tax professionals have the training and experience to ensure all your tax documents are filed properly. If you do them yourself and make a mistake, you could get audited and end up owing more than you prepared for.
Plus, working with the same tax professional each year creates a trusting relationship. They get to know you and your business. They might be able to find ways for you to save money.
Save yourself the time, money, and effort by working with a pro.
Interested in Learning More About Taxes for Freelancers?
Doing your own taxes is challenging on its own. Filing taxes as a freelancer adds an extra layer of difficulty. We have outlined all the secrets you need to know when filing taxes for freelancers! So, learn everything you need to know today. Working with a tax professional may even make things a little easier.
Use the tips above to prepare your freelance business for tax season. Then, check out the Free Tools on our site to keep more money in your pocket!
Are you ready for tax season as a freelancer?
AUTHOR LaTia Longuemire
My name is LaTia Longuemire. I enjoy writing, singing, and cooking in my spare time. My passion is helping others. At this stage in my lifetime, I'm primarily focused on my children. They are everything that keeps my world spinning.