7 Things About Taxes Every Freelancer Should Know
From the non-traditional schedule to the flexibility of location, freelancing certainly has its perks. When it comes time for tax season, though? It’s pretty easy to lose sight of them.
Taxes for a freelancer are notoriously confusing. From the write-offs we’re eligible for to just calculating our many streams of disparate income, there are a lot of nuances that traditional 9-to-5ers just don’t have to deal with.
Are you preparing to file your first round of taxes as a freelancer? Feeling a little confused or just don’t know where to start?
Here are 7 things to keep in mind as tax seasons approaches
You need to pay taxes quarterly.
As a freelancer, you’re supposed to pay what are called “estimated taxes” to the IRS once every quarter (technically in January, April, June and September.) Though it can be a hassle to take time and estimate your quarterly earnings, factor in your expenses and figure out roughly what you should owe, it pales in comparison to the alternative: paying a gigantic lump sum — plus a penalty — when you file your returns.
You also have to file your annual return.
Even though you’re paying your taxes in quarterly installments, you still have to file an annual return on or before April 15 each year. You’ll need to report your full income for the previous years, as well as any deductions or credits you’re claiming. If you’re filing jointly with your spouse, you’ll report on their income and earnings as well. Assuming they work a traditional 9-to-5 job, they’ll receive a W-2 to make filing their portion of the return easier.
You won’t get a tax form from every client.
Technically, clients are supposed to send you a 1099 form stating how much they paid you in the previous year (as long as they’ve paid at least $600). In my experience though, a good chunk of clients just don’t do it. It may be that they’re unaware of the requirement when working with contractors, or they might just be trying to brush those payments under the table. Regardless, you should also report everything you’ve made throughout the year — whether you have a 1099 to prove it or not. Having a good accounting system in place can be a huge help here (I personally love Wave).
Knowing your deductions can help a lot.
There are many deductions you can sometimes take as a freelancer that can help reduce your overall tax burden. If you work from home, for example, you can usually deduct a portion of your utilities/mortgage payment, your internet costs, and home maintenance fees. You may also be able to write-off things like equipment costs, mileage, expenses for your website or domain hosting, and more. Talk to a certified accountant for more guidance on what deductions you may be eligible for, because we certainly are not tax professionals.
Don’t get sticker shock.
It can be easy to have sticker shock the first year you’re paying freelance taxes — especially if you’re coming from a traditional salaried job. With a salaried position, you pay a portion of your taxes and so does your employer, so your total tax burden will seem a lot lower than it actually is. When you go freelance, you pay for not only your portion of the taxes but also that “employer” portion as well. Generally, experts recommend freelancers set aside about 30% of their income to put toward taxes.
Keeping your receipts is key.
Make sure you’re keeping receipts for any and all business expenses — whether you’re buying a small planner to keep track of your appointments, a $20 tank of gas, or a $5,000 computer. You should also keep an email folder with any e-receipts you’ve received — things for computer security programs, domain costs, etc. This can make end-of-year calculations and deductions infinitely easier.
Don’t be afraid to ask for professional help.
Sure, there are programs like TurboTax that can make filing your tax returns easier, but that doesn’t mean you have to go this route when tax season rolls around. Freelance taxes are a unique animal, so it can’t hurt to consult a professional to make sure you’re filing properly and maximizing the deductions you’re eligible for. Who knows, your advisor may even pay for themselves if they save you enough cash.
Freelance Taxes: The Final Word
A quick disclaimer: While Embrace Home Loans loves to help customers make the best financial decisions for their long-term goals, we are not certified accountants or tax experts. For the most detailed and accurate guidance regarding your tax obligations as a freelancer, make sure to speak to a qualified financial advisor in your state.
And remember, if you’re ever looking to buy a home, Embrace Home Loans is here to help. We have loan products designed just for self-employed, non-traditional borrowers like yourself, so contact us any time to learn more about your options.