Do you understand taxes for freelancers and how to track income? Last year, 57 million people in the United States earned their living through freelancing. That, according to the same source, represents 35% of the workforce!
This rise in freelance popularity is hardly surprising. After all, working as a freelancer is to have total control.
You work on your own terms rather than an overbearing boss; you can often work remotely too, earning money from the comfort of your home or the luxury of a tropical beach.
Sounds good, right? But it isn’t all smooth sailing. Taxes for freelancers and tracking your spending are two particular areas that can cause problems.
Suddenly, as a self-employed worker, you’re in charge of filing your tax returns! Looking for help in this endeavor? Keep reading for 6 key tips and considerations on freelance taxes and income tracking.
#1]. Get yourself an accountant
Why make life harder than it needs to be, eh? By far the easiest way to approach this is to hire someone to do it for you! After all, freelance life is about avoiding headaches and being your own boss. Working with a professional to help with your taxes makes sense on both of those counts.
Sure, you pay for the privilege. A good accountant can set you back some serious cash. For freelancers on a tight budget, that fee might not be feasible. For anyone who can afford it, though, that professional input can relieve a mighty burden.
Moreover, it might save you money in the long run. See it as an investment! You’ll avoid costly mistakes and inadvertently overpaid taxes. Better still, their insight might save you further cash on taxes you might not need to pay.
#2]. Educate yourself
Filing your taxes without the support of an accountant is, as we just mentioned, a little risky. You might lack the understanding required to file everything correctly. With your name on the dotted line, you might inadvertently set yourself up for a fall with the IRS.
All the same, filing your taxes by yourself is definitely possible. But it pays to educate yourself first and ensure your business is tax compliant. Try to go into the process with a reasonable understanding of what’s expected of you.
Start by finding out about the taxes you actually need to pay! Freelancers must pay income tax, as well as self-employment tax (15.3%). That might sound a lot. That’s because, as a freelancer, you’re considered an employer as well as employed!
You front the tax that your employer would otherwise cover. The good news is that the employer portion is often tax-deductible. Form 1040 is what you use to report your self-employment tax. It’s also the form with which you can deduct the 50% employer portion.
#3]. Start saving
Newbie freelancers often fail to consider taxes. They’re so used to having tax automatically deducted from their payslip that they spend everything they earn. That spells trouble when they wind up with a tax bill they can’t pay. To avoid that eventuality it’s important to save a portion of your income each month.
It’s impossible to say exactly what you’d need. However, a cautious estimate of 30% to 40% of your income should cover it. Setting up a direct debit that automatically funnels this cash into a separate bank account can help. It means you don’t have the chance of spending this vital stash of cash!
#4]. Pay tax quarterly
Don’t assume you only have to pay tax once a year. Taking that approach can land you in trouble with the IRS. Instead, you should try and pay it every quarter (assuming you expect to owe more than $1,000 worth of tax). Here’s where it can get confusing. If you expect to earn that level of income, then you should estimate the tax you think you’ll need to pay each quarter.
You then pay the IRS in line with those estimates. Form 1040-ES can help set your estimates. Don’t worry, any overpaid tax will be repaid to you in full. Alas, if you didn’t pay enough each quarter, then you’ll have to pay the balance when you file your annual return.
#5]. Track your income
Tracking your income is vital for freelancers. Helpfully, all of your clients from whom you earn over $400 should provide a 1099-MISC that details the payment. That should make it easier to keep a tab on things.
The trouble is that online payment platforms such as PayPal are being used with ever greater frequency. When you’re paid in this manner, you’ll get a 1099-K form instead.
Why’s that bad? Because clients don’t have to provide this unless you’ve earned a significant sum of money (over $20,000), or been paid on more than 200 occasions by them. Assuming that’s not happened, then you won’t get the 1099-K.
Regardless, you’re still required to fill out a Schedule C tax form. It’s on this form that you must detail all over your freelance income- absolutely everything! Confused yet? Keeping track of your own pay stubs can help. Check stub maker to do it with ease.
With a great tool like Taxfyle, you’ll understand how to calculate your income tax. Their income tax calculator is designed to set you up for success. This could help you understand what to expect and how to structure your finances to make the most of your refund or plan for upcoming tax payments.
#6]. Leverage deductions
Nobody wants to pay more tax than they need to. This is where deductions come into play. Basically, certain expenses you’ve paid out to further your business can be taken away from your taxable income.
You can save significant sums of money by making the most of the deductions you’re allowed to make. Nicely, self-employed people have a range of expenses for which they can claim. The trouble is that most freelancers fail to make the most of them.
Or, alternatively, claim for things they aren’t technically allowed to. Everything from advertising and marketing to office supplies can be deducted. Be sure to educate yourself on this topic to ensure you’re saving as much on tax as possible.
Time to understand taxes for freelancers
Freelancing is becoming increasingly popular in the US. However, as freeing as it can be, becoming your own boss isn’t without its challenges. Taxes for freelancers are one such example of a possible conundrum to overcome.
Hopefully, this piece has cleared up some of the mystery around them. Want to read more articles like this? Search ‘self-employed’ on the website now.