Nobody enjoys filing taxes, but the process can be particularly arduous for freelancers. Between estimated tax payments, home office deductions, self-employment taxes, business expenses, and stacks of 1099s, freelancer taxes can be quite the quagmire. There are plenty of stories out there about new freelancers who didn’t put money away for taxes over the course of the year and experienced a rude awakening, to the tune of thousands of dollars, come tax season.
As annoying as dealing with taxes may be, it’s also an opportunity for freelancers to take stock of the previous year, evaluate income and expenses, and (hopefully) identify ways to reduce tax bills.
Here are a few things to think about when preparing your taxes and tips to guide you along the way.
To avoid under or over paying in estimated taxes, pay close attention to how much you are generating in income and how much you can deduct.
While employers calculate and deduct taxes for their full-time employees, freelancer clients are not required to do the same. Freelancers are completely responsible for estimating and paying their own taxes, including: Federal income taxes, state and local income taxes, and self-employment taxes, which consists of deductions for social security (old-age, survivors, and disability insurance) and Medicare (hospital insurance). Depending on where you live and other circumstances, like dependents and income, the tax bills can be quite high. This is why it’s so important to pay estimated taxes every quarter. Here's a great article from Lifehacker that gives an in-depth look into the topic of paying estimated quarterly taxes.
In short - the IRS requires freelancers to pay estimated taxes four times a year, or once a quarter. It may seem annoying to have to pay taxes four times a year, but it’s actually a great way to ensure you have enough money set aside for tax purposes. Freelancing can be unstable, with ebbs and flows in workload, and many freelancers live from paycheck to paycheck. Saving is not easy. A common freelancer mistake is failing to factor taxes into your budget and then finding yourself unable to pay what’s owed. Paying quarterly taxes can help you avoid this fate.
To avoid under or over paying in estimated taxes, pay close attention to how much you are generating in income and how much you can deduct. Whether you use spreadsheets, a software tool like Quickbooks, or a combination of both, tracking every dollar in and out is key to gaining control over your tax situation.
While freelancers are saddled with self-employment taxes, there is also a wide world of deductions available to them to reduce tax liability. Optimizing deductions is a critical part of paying freelancer taxes. To be deductible, the IRS states that a business expense needs to be “ordinary and necessary.” Ordinary, in that it’s common and accepted in your field, and necessary, in that you need it to conduct business. Internet and cell phone service are fairly universal deductions. A freelance journalist may deduct costs like newspaper and magazine subscriptions, books they need to conduct research, or travel expenses for reporting trips. A freelance graphic designer may deduct graphic design software. A freelance photographer can deduct camera equipment and film. Education and training, advertising, insurance, and office supplies are all other examples. And remember to keep receipts and records of everything and categorize and itemize your expenses. Stay organized!
Another common freelancer deduction is for a home office. Many freelancers regularly work from home and that makes certain home related expenses—like mortgage interest, rent, utilities and insurance—partially tax-deductible.
Know what kind of return to file
There are number of ways to operate as a freelancer. Some freelancers operate as a sole proprietor while others set up an LLC, a C-corps, or an S-Corp. The structure of your freelance business impacts how you pay, so make sure you are filing in the appropriate way.
Also make sure all of your clients send you a 1099. Many businesses don’t have a formal process for freelancing onboarding and may forget to collect a W9 from you at the outset and/or send a 1099 at the end of the year. Make sure you have all the forms you need for any employer that paid you over $600, and if you don’t receive one before February, check in with them.
Read our related blog post: A la carte' Freelancer Financial Resources - Discover how you can pick and choose a set of tools to manage your finances better as freelancer.
Taxes can be extremely confusing, so don’t be afraid to get help. Plenty of freelancers are reluctant to shell out for an accountant because they can be expensive, but if you end up overpaying in taxes, you lose money anyway. Having a professional who can help make sure you are deducting everything you can, in a compliant way, can end up saving you money, not to mention stress and headache. If you are rigorous about income and expense tracking in a tool like Quickbooks Self-Employed, great. If you are interested in some more hands-on help, consider a tool like TaxFyle, which connects you with an accountant through an app. Or ask around your professional and personal networks about an accountant with freelance tax experience.
Figuring out freelancer taxes gets easier over time. The key is to stay as organized as possible throughout the year and maintain vigilance around tracking. If you do those things, tax season may not feel so bad.