Whether you’re a freelancing travel writer, a graphic designer, or a management consultant, you can agree that being self-employed has countless benefits, except for when its tax season. Having to gather documents from numerous clients can quickly become overwhelming which is why we’ve compiled a telltale list to save you from finding yourself in a predicament.
The most critical step for filing as a freelancer is gathering and reporting all of the sources of your income. The recommendation is to keep 6 years of receipts and documentation, just in case. The greater the variety of work, the tougher this task will pose to be. Keep track of your income by creating an organizational system throughout the year to store your documents. Even if you have received payment in the form of cash, you are liable to report that as relevant income.
- Tax Liability
Certain unique IRS filing requirements and additional deadlines exist. Maintain safe records of the 1099-MISC tax forms by early February for each client which you performed contract work for and earned at least $600. File this income under Schedule C of the 1040 tax return. Freelancers are responsible for paying quarterly estimated taxes throughout the year.
- Self-Employment Contributions Act
The rule is that freelancers who make over $400 annually through 1099 contract work are instructed to pay the self-employment tax of a combined 15.3%. The plus side is that this tax already covers social security (12.4%) and Medicare taxes (2.9%).
Generally, the amount subject to self-employment tax is 92.35% of your net earnings from self-employment. Your net profit is equal to the gross revenue you earned minus all deductible business expenses you obtained. This portion of the return is listed under Schedule SE, which you can use to compute how much self-employment tax you owe.
- Commonly Deducted Expenses by Freelancers
It is crucial to have relevant information before crunching the numbers. For instance, if you have profits of $100,000 from freelancing and $20,000 of that sum is made up of deductible expenses, your tax will only be based on $80,000 of profit. That makes a huge difference!
The following are some commonly deducted expenses:
Required equipment or materials
Travel for meetings
Some items may be borderline questionable to report and the best rule of thumb is to only list items that you would not otherwise own if you weren’t running your freelance business. To avoid problems with the IRS, keep your business and personal expenses separate. People usually run into trouble when becoming unable to prove that the use of their new smartphone is only for work. Feel free to learn more on the IRS Website.
- Consider Incorporating
Rather than continuing to work as a sole proprietor, consider establishing a formal business in which you can do all of your work as a freelancer. Doing so would offer protection through limited liability as well as provide increased opportunities for tax savings. Also, a big bonus is that the chances of being audited as an incorporated business are fairly low compared to self-employed taxpayers who are required to file a Schedule C. Furthermore, one of the biggest expenses for a freelancer is the personal health insurance cost. Through incorporation, your company may be eligible to purchase medical/dental plans at a deducted price. Although these are great positives, it’s a guaranteed good idea to speak with a professional when deciding if incorporating makes sense for your business.
While these are some helpful tips for any freelancer struggling this tax season, it’s good to keep in mind that there are highly skilled people available to help alleviate some of that struggle. Only a professional familiar with your finances will be able to give you specific tax advice tailored properly for your own unique situation.