Being a freelancer sure has its perks, doesn’t it?
You don’t have to worry about requesting time off.
You don’t have to come up with an excuse for why you were late to work.
And traffic? Ha! The only traffic you run into is on your website.
As great as being a freelancer is, there is a downside: freelance taxes.
When you work for someone else, they handle taxes for you. You get a W-2 at the end of the year and file your 1040. Easy peasy, right?
When you’re a freelancer it’s not that simple. It can actually get a little confusing.
In this guide, we give you 10 tips on managing your freelance taxes.
1. Know Your Structure
Do you know your business structure? Have you even thought about it?
When you’re a freelancer, you’re the business. But you need to know what kind of business you are.
You’re responsible for all profits and debts. This is popular with freelancers because you don’t report to anyone and you’re not a public entity.
But, there’s no separation of personal and professional assets. This means if you get sued, your personal assets are at risk.
This is exactly how it sounds. You’re in a partnership with someone. This could be a family member or a co-worker who you’ve decided to partner with.
There are two kinds of partnerships: general and limited. General means everything gets shared equally. Limited means one person has control and the other contributes.
Limited Liability Company
An LLC allows you to enjoy the tax benefits of a partnership without the personal liability of a sole proprietor. It’s a cross between a partnership and a corporation.
In general, it’s not too complicated to establish yourself as an LLC. But it does cost money.
You’ll have to do some legwork as far as coming up with a name. You’ll also have to file “articles of organization” in your state.
Most freelancers don’t bother becoming a corporation. It’s more complicated than establishing yourself as an LLC. There are different types of corporations and you’ll have to follow specific guidelines.
Of course, after you research the different types of business structures, you may feel a corporation is best for you. By all means, do what you feel is best for your situation.
2. Stay on Top of Your Clients and Your 1099s
If you make more than $600 from any client, you must file the amount as income. The client should provide you with a 1099-MISC form. This will show exactly how much they’ve paid you over the course of the tax year.
The IRS says you should expect your 1099 form by January 31st. But if you haven’t received a 1099 from a client you’re supposed to by February 15th, the IRS recommends you contact them.
If you hired freelancers to work for you, make sure you send them a 1099 form, too.
3. Know What Kind of Return You Should File
If you live in one of the seven states that don’t have a state income tax, this part will be easy for you.
If you haven’t established yourself as a business or you’re an LLC, you’ll likely file a 1040 Schedule C. This form is close to a 1040 or 1040 A you filed when you were an employee.
If you’re structured as a partnership or corporation, you’ll need to file a separate return:
- 1065 – Partnership form
- 1120 – C-corp
- 1120S – S-corp
Check the IRS website. They have an explanation of all the forms you may need. Remember, you need to file a state income tax if you live in 43 states, so check your state’s website for information on what you need to do.
4. Prepare to Pay a Self-Employment Tax
When you’re an employee, your paycheck shows three tax deductions every pay period. Unless, of course, you’re one of the lucky freelances that don’t pay a state income tax.
These deductions are:
- State tax (and any local taxes)
- Fed income tax withheld
- FICA – Social security and Medicare
But when you’re a freelancer, you don’t pay these every pay period. So, they have to get paid at the end of the year in the form of the self-employment tax.
The current tax rate is 12.4% for social security and 2.9% for Medicare. You file these on a Schedule SE.
5. Make Estimated Payments
On April 15th, June 15th, September 15th, and January 15th, your quarterly taxes are due. If this is your first year as a freelancer and you didn’t know you have to pay taxes every three months, it’s okay.
You’ll just end up paying your entire year’s taxes in one lump sum when you file.
Moving forward, get familiar with making estimated payments. It will save you a lot of headaches come April 15th.
6. Keep Track of Everything
If you’re your own bookkeeper, make sure you’re keeping excellent records. You need to keep track of all your invoices and expenses. You should also keep track of financials.
If you use paper billing, scan all your invoices into your computer. Likewise, if you send them via email, print out a copy.
Get a binder or filing cabinet and make sure everything is separated, well-marked, and easy to find.
7. Know What You Can Deduct
Half of the people who are self-employed think everything is a deduction. The other half isn’t deducting enough.
In general, if you work from home you can deduct:
- Office furniture
Some expenses, like your cell phone and Internet, get used for both home and work. You can deduct part of these expenses on your 1040.
8. Claim the Home Office Deduction
This sounds like it’s complicated, and to a degree, it is. There are very strict regulations you have to follow. More than anything, you must keep impeccable records.
The IRS stipulates that you can claim the home office deduction if you use a section of your house “exclusively and regularly” for business purposes only.
For example, if you work 40 hours a week in your home office, but your spouse uses it for an hour to catch up on his work, you’re putting your deduction in jeopardy.
We told you there were strict regulations!
In return, you get to claim a percentage of your rent, mortgage payment, utilities, and insurance. But, your home office must be your primary place of business and you must use the space exclusively for your business.
9. Contribute to a Retirement Account
You may not make enough yet to contribute to a retirement fund, but it’s something to keep in mind for the future. Being self-employed, there are three types of accounts you may qualify for:
- Individual retirement arrangement (IRA)
- Solo 401(k)
You can save on taxes and save for the retirement at the same time.
10. Call for Help
Some freelancers get overwhelmed with freelance taxes and that’s okay. Math may not be your bag, or you don’t have the patience for it.
If this sounds like you, don’t hesitate to call a tax professional. You’ll still need to keep track of everything, but you won’t have to worry about missing any forms or schedules.
Yes, this is an added expense you didn’t expect to pay. But ask them if it’s tax deductible.
Tips and Insights on Freelance Taxes and More
Being a freelancer gives you all sorts of freedom that people with a regular 9 to 5 don’t have. But, unlike those 9 to 5ers, you have to deal with your own taxes.
We hope this 10-step guide shed some light on freelance taxes. Even if you’ve missed the boat on these tips this year, you have a guideline to follow for next year.
Remember to keep track of everything and set money aside for paying quarterly taxes. These two changes alone will make freelance taxes more manageable.
If you’d like more helpful tips on freelance work, visit our blog.