For the majority of the year, freelance work can be a rewarding part-time or even full-time gig. A convenient schedule with flexible hours and extra income are a big plus. However, when tax season rolls around, things can get stressful and downright scary if you haven't prepared properly. Freelance taxes don't have to be stressful. The goal is to know what is expected of you and plan ahead. Here's what you need to know if you're filing this year as a freelancer.
If you are a freelancer and gross $400 or more during the tax year, you'll have to file a tax return. Remember though, filing taxes and paying taxes aren't the same thing. For example, your freelance business could have earned $8,500 in gross revenue but you had $8,200 in deductions, your net profit would be $300. You'd still have to file but likely wouldn't pay taxes on that amount of profit. Over $400, Freelancers are required to pay their own self-employment taxes. These taxes cover your Social Security and Medicare obligations.
As a freelancer, your income will likely be reported on a 1099-MISC tax form. You may or may not receive a physical tax form from clients but, rest assured, the IRS knows about this income. As a freelancer, you'll have to file an annual tax return. You'll also likely have to make quarterly estimated tax payments to cover your self-employment taxes. To figure out what you owe, use Form 1040-ES. For your annual return, you'll be filling out a Schedule C tax form.
Because freelancers are not taxed on the income they make (like someone in a salaried position), they have to make up for it with estimated quarterly taxes and then potentially more come tax season. Someone in a salaried position receives a monthly, or bi-monthly check. When they receive those checks, a portion of what they actually make is already taken out and goes straight to the government. This is usually 20-30 percent, depending on their income. You'll notice that taxes are not taken out of the checks sent to you. Depending on the arrangement, you may even get hand-written personal checks. As such, it's important to put money aside all year long, so when tax season comes, you're prepared to pay. Most importantly, don't forget to pay your estimated quarterly taxes. Your accountant can help you prep for that, or you can use this 1040-ES form to figure them out on your own.
If it's your first time filing as a freelance worker and you can't get your paperwork together by the tax deadline, you have options. This is also the case if you wind up owing thousands of dollars because you haven't been paying quarterly taxes. File an extension: The most important thing to know about filing an extension is that it's an extension to file, not an extension to pay. You will still owe interest on any unpaid amount past the tax-return deadline, including additional penalty fees.
Tracking your expenses is the key to owing as minimal as possible come tax time. These expenses can then be deducted from what you owe so, ideally, you end up getting money back, rather than owing more. The crazy part is, you can write-off a surprising amount of items. This includes a portion of your rent or mortgage, Internet costs and cell phone bills. You can also deduct money spent on office supplies, gas used, business mileage and any other item you paid for to maintain and complete your freelance. Keeping track of everything is the key to saving come tax time. There are a number of ways to track your expenses, from a spreadsheet to apps. Whatever works best for you is the method to stick with, as long as it means you're tracking everything.
The average tax preparation fee nationwide is $273, whether you're using an accountant or a tax program. While an accountant may charge more, I know I paid more than that to work with my accountant this year‚ you'll end up saving in the long run because to hire an accountant is the best way to ensure you make the most of every deduction as a freelancer. While many of the most well-known platforms have come out with freelance-specific options, their list of deductions may not cover some of the items on your list. Not to mention, if you're relying on that to find deductions because you haven't been tracking throughout the year, you'll likely miss out on saving a large chunk of money.
Immediately put away a percentage of every check you get. While this percentage increases with your income, aim to put at least 20 percent away for taxes. If you know you'll have skimpy deductions, put away more than that to be safe. Remember, the earlier you file the better. If you need some time to get the money together or file an extension, you have it. Tax season doesn't have to be stressful for freelancers. Save money to make sure you're in a good place come tax season and remember that you can file for an extension and move forward this year with these best practices in mind.