When I first began thinking about pursuing a career as a freelance writer, I envisioned my days working from home in pajama pants, cranking out work that I could take pride in. But do you know what part of the process I didn’t think about? Filing taxes as a freelancer.
That’s right. Utter the phrase “tax time” to a group of self-employed professionals, and you’ll immediately inspire a collective groan. Dealing with tax payments is one of the worst parts of being a freelancer (well, that and buying your own health insurance).
So what do you need to know if this is your first tax season as a free agent? Here are five essential tips for filing taxes as a freelancer.
1. Recognize That You Need to Pay
There are a lot of myths about how taxes work in the freelance world. But it’s important for you to recognize that they’re just that — myths.
There’s one that you’ll hear echoed time and time again that goes something like, “I didn’t earn enough to have to pay taxes.”
Many assume that if they earned less than $10,000 (or something similar), they’re too small for the Internal Revenue Service (IRS) to bother with.
Unfortunately, that couldn’t be more incorrect. Though there is a threshold that dictates whether or not you need to file, it’s far lower than most people assume; in fact, it’s a measly $400.
So that means that if you earned more than $400 as a freelancer throughout the year after expenses, you absolutely must file your taxes, according to the IRS.
Why? Well, for starters, you need to pay your self-employment taxes (more on those later) in addition to regular income taxes.
Don’t fall into the trap of thinking that your business is too minuscule for taxes — that’s almost never true.
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2. Start Preparing Early
One of the biggest tax tips for freelancers that I wish I’d known in my first year? Prepare early.
During my first year as a freelancer, I didn’t stay on top of taxes as well as I should have. My 1099 forms began arriving in the mail, and I threw them all into a stack on my desk to deal with later without even giving them a second glance.
The night before my appointment with my tax accountant, I spent hours sorting through everything, only to find an error on one of my forms.
A frantic scramble followed. The moral of the story? Leave yourself plenty of time for filing taxes as a freelancer. It’s not always an easy process, so you’ll often be glad you gave yourself a buffer — especially if you wind up finding mistakes.
3. Stay Organized
In a similar vein, tax time will be much easier if you keep yourself organized throughout the year, and then leave yourself some time to double-check that you have everything set to go before you file.
From the tax forms and tracking of your income to logging your expenses and keeping the necessary receipts, there’s a lot to keep organized when you’re a freelancer.
I can’t emphasize enough the importance of receipts and bills, and finding an organizational system that works for you. Whether it’s a handwritten ledger or using software like QuickBooks, develop a system that’s suited to your workflow and use it throughout the year. Knowing exactly how much of your business expenses can be deducted from your freelance income is essential.
- Internet-related expenses, including any domains or hosting-charges you may have paid, plus other costs related to marketing your business and services.
- Travel expenses related to your business, which can include plane, train, or automobile costs, in addition to hotel lodging.
- Equipment, which can include laptops, scanners, cameras, and any software purchased and used to run your freelance enterprise, as well as furniture purchased for a home office.
- Professional fees paid to coaches, lawyers, accountants, and financial planners to help you with your business. It is important to note, however, that legal fees paid to acquire assets for your business will not be deductible, according to the IRS.
- Professional development costs like e-courses, workshops, seminars, and webinars, in addition to conferences.
4. Get the Right Forms
Paperwork, paperwork, paperwork. There seems to be a never-ending avalanche of forms when filing taxes as a freelancer, which can ultimately add to your confusion in the lead up to 2021's May 17th tax deadline.
However, it’s important that you get your hands on the correct forms that you need. And there’s one that many people often forget about: their self-employment tax, which covers Social Security and Medicare.
If you worked for a traditional employer, your company would deduct taxes from your paycheck, match that contribution, and then send the taxes to the IRS.
But as a freelancer, you’re left to cover both the employer and the employee share.
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This is where self-employment tax comes into play. As a freelancer, your tax rate will be 15.3 percent, which will contribute to your Social Security and Medicare payments. Of your net earnings, combined wages, and tips, your first $137,700 will be tied to this tax when filing for earnings made during the 2020 tax year, according to the IRS.
As the Social Security Administration tells us, you need to complete the following federal tax forms by the federal tax deadline (typically April 15th) after any year in which you have net earnings of $400 or more:
- Form 1040 (U.S. Individual Income Tax Return)
- Schedule C (Profit or Loss from Business) or Schedule F (Profit or Loss from Farming) as appropriate
- Schedule SE (Self-Employment Tax)
Luckily, the IRS makes all of these forms conveniently accessible on their website, so you should be able to easily get your hands on the paperwork you need.
And remember that, according to the Social Security Administration, “Even if you don’t owe any income tax, you must complete Form 1040 and Schedule SE to pay self-employment Social Security tax. This is true even if you already get Social Security benefits.”
5. Consult a Professional
Let’s face it: Even with all of the tools, resources, and information available, navigating your way through filing taxes as a freelancer can be perplexing at best and costly at worst.
So when in doubt, one of the best tax tips for freelancers is to set up an appointment with a certified public accountant (CPA) — especially one who specializes in working with freelancers.
Yes, their expertise will cost you some money. But in the end, it’s worth it to know that you’re getting things done the right way, plus you’ll avoid getting hit with any penalties (as well as the pain of filing an amended return later on). And even better? You’ll save money.
“Freelancers will almost certainly miss out on deductions if they don’t seek out a CPA that really understands their world,” says Bret Scholl, a CPA with “Plus hiring a CPA is also deductible for both regular income tax as well as the self-employment tax.”
The Bottom Line
For all the pain associated with the months leading up to May 17, filing your taxes as a freelancer is possible. Get your ducks in a row by collecting the right forms, leave yourself plenty of time, and know when it’s time to call in the big (accounting) guns — you’ll be square with the IRS before you know it.
Additional background information for this article was provided by Bret Scholl, CPA, of Scholl & Company.