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How to do taxes as a freelancer

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People who freelance part-time or full-time have lots of benefits. They get to make their own hours, be their own boss and control their workload. Even if you take on freelance work on top of a regular job, you benefit from supplementary income. 

Unfortunately, one way that freelance life isn’t as easy is when it comes to taxes. When you work for a company, the business typically takes taxes out of your paycheck. However, if you’re a freelancer, taxes become significantly more challenging.

With freelance or “gig” work, you’re paid the full amount and expected to pay the IRS your owed taxes later on. This can be incredibly intimidating if it’s your first year filing taxes as a freelancer. 

This guide will take you through how to do taxes as a freelancer, with some essential tips and tricks you can keep in mind for future years. 

Understand the basics of freelance taxes

The first step is to understand the basic rules and regulations for freelance taxes. 

The minimum you have to earn to pay freelance taxes

You’ve probably heard that all income is taxable. That’s essentially true, but there’s a minimum amount you have to earn. Individuals have to file a tax return if they earn self-employment income of at least $400. 

The self-employment tax

As a freelancer, you don’t just have to pay income tax—you also have to pay self-employment tax. Your self-employment tax is your FICA taxes. This is the money an employer would take out of your paycheck for Medicare and Social Security taxes on top of income tax. If you work for an employer, you pay half the FICA taxes directly out of your paycheck and your employer pays the other half. 

With freelance work, you’ll pay the full amount because you’re simultaneously your own employer and employee. However, the “employer” portion of your FICA taxes is deductible as a business expense. 

Self-employment tax is 15.3 percent of the first $137,700 of freelance income you earn for 2020. (This amount increased to $142,800 for 2021.) Anything above that threshold is taxed at 2.9 percent. 

When you set money aside for your taxes, you should be sure it’s enough for both your income tax and your self-employment tax. 

The tax forms you’ll need to use

Individuals who have an employer typically get a single W-2 form for their taxes, but this isn’t the case for freelancers. 

There are a few forms you’ll need when filing your freelance taxes. First, you can refer to Form 1040-ES to get help calculating your self-employment tax.

Part of the challenge of filing taxes as a freelancer is that your income likely came from several clients. Each client that pays you more than $600 must provide you with a 1099-NEC form. You report the income from your 1099-NEC forms on a Schedule C attachment of your tax return. Prior to 2020, 1099-NEC forms were called 1099-MISC forms. Note that 1099-MISC forms still exist, but now they’re not used for self-employment income reporting. 

Some clients pay their freelancer workers via PayPal or other similar electronic payment systems. If this applies to you, you may be able to get a 1099-K form from the electronic payment system directly. 

Not receiving a form from a client or payment system is no excuse not to file taxes. You still legally owe taxes and are expected to file regardless of receiving your forms.

The deadlines

Another difference for freelance taxes is the frequency of payments. Instead of paying your taxes annually, you need to pay the IRS every quarter (meaning, every three months). If you were working for an employer, they’d be deducting taxes every paycheck. Similarly, the IRS wants your money throughout the year, so they expect freelancers to pay quarterly. 

You have to pay on a quarterly basis if you expect to owe more than $1,000 in taxes. Since you won’t know the exact amount for the entire year, when you pay quarterly it’s referred to as “estimated taxes.”

Estimated taxes are due:

  • April 15th for the tax period of January 1 – March 31
  • June 15th for the tax period of April 1 – May 31
  • September 15th for the tax period of June 1 – August 31
  • January 15th of the following year for the tax period of September 1 – December 31st 

If the date falls on a weekend or a holiday, the tax deadline is pushed to the next business day. You don’t have to wait for the tax deadline if you don’t want to—you can always pay your taxes early if you want to stay ahead. 

Paying your taxes quarterly will ensure you avoid interest or the estimated tax penalty. 

Consider working with a tax professional

Freelance taxes are complicated, so it might be a good idea to work with an accountant. As we’ve already noted, there are exceptions for almost every rule. Additionally, you want to make sure you’re taking advantage of every possible tax break you can. Some freelancers can write off tax deductions for business-related food, travel expenses, hotels, office expenses and related materials. However, you want to make sure you do so correctly.

Even if you think you have a handle on the tax process, the IRS changes it quite frequently (such as the switch to the 1099-NEC form we mentioned earlier). For these reasons, hiring a tax professional is often the best route for freelancers. 

Set aside around 30 percent of your income

The general rule of thumb for freelancers is to reserve 30 percent of their income for taxes. Remember that you’re paying for a combination of income tax and self-employment tax, which is why the percentage is so high. 

Some individuals will need to save more or less depending on their personal circumstances. If you’re working with a pro, they can help you with this estimation. Additionally, after a few years, you’ll better understand how much to put aside based on your average earnings. 

It’s imperative to put this money aside as soon as you get paid so you don’t spend it and end up in a situation where you can’t pay your taxes. Freelance income can be very sporadic, so you shouldn’t spend now and assume you’ll be able to earn what’s owed on your taxes later on.

Most people recommend a budgeting system of automatically moving the 30 percent into a separate account reserved for your taxes. 

Keep track of all your expenses and sources of income daily

As a freelancer, you’re required to keep track of all of your paperwork. Since you don’t have an employer that will sum up everything for you, you need to track all your income sources and expenses. For example, you might work with dozens of clients in a year. You must track each client, how much you charged them and when they paid so you can report on your taxes accurately. 

Identify what deductions you can take

Freelancers are eligible for a wide range of tax deductions that a regular employee can’t claim. Some of the most common ones include:

  • Office supplies
  • Travel expenses (hotels, plane tickets, mileage, etc.)
  • Home office expenses
  • Business-related meals 
  • Advertising and marketing
  • Computer equipment and software
  • Utilities (internet, phone)
  • Health insurance
  • Legal services
  • Contract services
  • Licenses

You’ll have to look into each individual deduction to understand better if you qualify.

Pay as much as you can

Ideally, you’ll pay everything you owe. But if you can’t pay everything at once, it’s still important to file. You’ll have to pay what you can and then discuss your situation with the IRS. You may receive an extension, get some of the penalties waived or be able to sign up for an IRS Online Payment Plan. The IRS will work with you to address your tax debt, so don’t ignore it. 

The consequences of not paying taxes are serious. You can receive late fees, incur interest and even get to a point where your wages are garnished. 

Protect your finances

It’s crucial that you take care of your finances in all regards. Along with keeping up with your taxes, you want to ensure you maintain a good credit score, pay off debt and save for retirement. A strong financial standing will help you in many areas of your life, such as securing a mortgage, auto loans, personal loans and credit cards and passing credit checks from employers.

Learn more about steps you can take to care for your financial health at CreditRepair.com.

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