Taxes 101 for Freelancers
Whether you are a content writer, designer, or developer, if you have joined the freelance economy and are enjoying the flexibility and steady work low, there are some other differences between freelancing and that 9-to-5 job that need your careful attention. The biggest area to ensure you get right involves taxes. After all, you don’t want to end up with an audit by the IRS, something that seems to commonly impact the freelance and small business community.
Instead, follow these quick tax tips and you’ll find yourself on the right path with your business obligations on the federal and state levels:
- As a freelancer, you are classified as an independent contractor by the IRS, which means that you are taxed on your net self-employment income (gross receipts minus any business expenses you can deduct). Your customers or clients will pay you a gross sum and never take any taxes out like would happen if you were an employee.
- If you make more than $600 per client, then they need to issue you a 1099. It’s good practice to make sure that every client has a W-9 filled out from you on file. You never know when the client relationship may grow into a longer and higher paying gig. Likewise, if you happen to get busy enough to hire additional help, you will not only need to get W-9s for those professionals, but you will also have to issue a 1099 and submit a 1096 to IRS, which shows the total of all the 1099s you issued for the year.
- The net amount is taxed for regular federal income tax, which now ranges between 10% and 39.6%, and then again at a 15.3% self-employment tax rate. Once earnings reach $118,500, this self-employment tax caps out.
- With this type of tax burden hitting your income after expenses, you can see the reason why you will want to stay on top of all the possible expenses you can deduct. This is where you need to familiarize yourself with the types of things you can write off. For example, if you establish a room in your home solely dedicated to your business, you can qualify for a home office deduction that includes a portion of your mortgage interest or rent, utilities, and insurance as measured against the square footage of your office as part of the total square footage of your home. Other deductions include supplies, any education you collect, marketing, client gifts, travel and meals related to your freelance business and some auto expenses also related to getting to job-related meetings or events. You can even write off dry cleaning as long as it all relates to your company. Just be prudent and honest with your expenses. It helps to keep copious records, including an app that can help you scan and catalogue receipts related to your business.
- Typically, you will be asked to make quarterly tax payments (four times a year in April, June, and September of the current calendar year and January of the new year) that serve as estimates for the year, which requires that you budget your revenue accordingly to make sure you can make these payments and still cover all your other expenses. The good news here is that, when April rolls around, you are not making one huge payment that can really kill that cash flow.
- Once you become accustomed to this new way of looking at your income and taxes, you can focus on a strategy that will optimize depreciation and deduction as well as create a retirement plan that offsets some of the tax burden. To ensure you have a good strategy, rely on a scalable accounting software system that fits your business size and budget to help you prepare the necessary financial documents for tax purposes and ensure you are on top of your income and tax burden for the year. For example, using an online invoicing system can also help to track your revenue so you can gauge just how much you may owe for taxable year.
- Use a tax professional or tax software to prepare your taxes for your freelance business as this can help to ensure you are fully compliant with how you are reporting your income and expenses.
The aforementioned tax tips apply for a sole proprietorship. If you have established your freelance business as an LLC or a C-Corp or S-Corp, your tax tips will be considerably different. These are recommendations based on another freelancer’s experience and should not be construed as professional tax advice. The best option is to consult a Certified Public Accountant (CPA) to ensure you have the most accurate tax advice possible. They can also provide more specifics based on your personal situation and type of freelance business.