Filing your taxes is rough, especially when you’re self-employed. Thanks to the shifting gig economy, there are now over 86 million freelancers in the U.S.
That is a huge jump from recent years, but no matter what industry the freelancer is in, there is always one hurdle to jump that they all share.
Self-employed taxes are a pain in the side for many independent contractors, especially for those who are just starting out.
Luckily, we can make it a lot easier for you. Let’s talk about freelance taxes and how you can make them a lot easier.
What You Need to Know About Self-Employment Tax
Self-employment taxes are different from employee taxes. There are two ways to pay yourself as a small business owner or an independent contractor, and that is salary or draw.
You can legally pay yourself a salary out of your small business and count yourself as an employee. However, you will still have to pay self-employment taxes for the business on top of your W-2 form.
The benefits of paying yourself a salary are that your income, not the company’s, will have taxes deducted throughout the year, and you will only need to pay taxes out of the company’s profits at the end of the year.
The downsides of this are that you will have to continuously use paystubs to pay yourself file separately.
The draw method is simply paying yourself out of the company money and filing solely as self-employed. If you choose the draw method, which is most common, you will need to save money for taxes throughout the year.
The benefits of this method are that you will only have to file once, and if you save the money properly and keep track of expenses, you will be in good shape.
The downside is that you will have to pay one lump sum at the end of the year, instead of having money taken out regularly.
However, because of the financial inconsistency that many freelancers will experience, especially early on, it can be difficult to pay yourself a consistent salary. This gives the draw method an advantage for most, as the salary method will only work for certain people under certain circumstances.
Learning how to pay yourself from a small business is tricky, but finding what works for you will pay out in the long run.
What You Need to File Your Freelance Taxes
It is hard early on in this type of career to figure out how to do taxes as a freelancer. Especially when you aren’t getting paystub numbers that you can just punch in to do everything for you.
Luckily, we’ll take this step by step with the basics. Here’s what you will need before filing.
Most of the personal information that you will need for filing self-employment taxes are simple things you would use for a W-2.
If you know your social security number and how much money you made, then you should be all set. The only other items you will need are a platform for filing and your tax paperwork.
This includes your 1099 forms. These are what independent contractors receive from the companies they work with.
If you worked with multiple clients and didn’t make over $600 from them in the previous year, you will not receive a 1099 form from them.
If you do not work with a client consistently enough to receive a 1099 form, you will need to track your income on your own.
Other than that, you will need receipts from any business expenses that you had throughout the year. For example, if you are an Uber driver, you should have a receipt for your new tires. We’ll get into that more in-depth later.
An online tax filing platform is the most popular alternative to using an accountant. The majority of freelancers will use an online platform to file, as many of them are intuitive and fairly easy to use.
The reason being that they are designed for independent contractors and the online processes make filing a little easier.
If you have a platform you are used to and you want to stick with it, then that is the best option for you. Use what you’re comfortable using.
How to File
Once you have what you need to get started, you should get reserve a couple of hours of your time to devote to your taxes.
If you have a lot of receipts, invoices and other means of income and expenses that you will need to file manually, you should reserve as much time as you can to get it done right. You need the extra time to avoid common mistakes. Here is what you’ll need to file for the best outcome.
Any money that you received from a client needs to be counted as revenue. Any amount of money you received that goes toward your business, whether you received a 1099 or not, should be counted as revenue.
Don’t worry though, you will not be paying taxes on all of it, only profit. Remember that profit is revenue minus expenses. Let’s talk about that.
As an independent contractor, any money you spent toward the business should be counted as a business expense. Lucky for you, depending on your industry, you may find there are a lot more potential write-offs than you thought.
Keep in mind that these deductions will be filed under a 1040 Schedule C.
If there is a lot of driving in your business, you can track the mileage and it will write off up to 54 cents for every mile. You should take that seriously because it adds up quickly.
Not only that, if your car is needed for your business, like with rideshare driving, you can write off the interest you are paying on your auto loan, sales tax if it was purchased, registration fees, maintenance and a lot more.
Most freelancers need a website for either marketing or a portfolio. If you use a paid hosting service, guess what you get to do!
Most of them will send the receipts via email, so be sure to save those in a file on your computer or smartphone for easy access.
If you have a designated office space, you can write off the rent that you pay for it. If that designated space is in your own home, you can actually write off the square footage of your office and watch that tax bill deplete.
Let’s say you are a writer and you use a paid platform like Microsoft Word. Well, that money can be taken out of the equation for your taxes.
Same goes for a new computer or hardware if it is necessary for your work. Just remember to save those receipts!
Internet and Phone Bill
If you are required to have a landline or a cellular phone for your business, you can count that as a business expense. Phone bills aren’t cheap, so a 12-month addition to your expenses adds up.
If you work from home, you’ll be saving on what you likely would have paid for anyway!
Every freelancer needs marketing in today’s world. Any online advertisements, business cards, fliers, or any other form of marketing that you paid for can help you reduce what you owe.
From staplers to ink in your printer, these expenses will always add up. Keep these receipts stored and tally up the total at the end. You may be surprised what a gem this one is.
We mentioned interest on auto loans for drivers, but any business credit line will add up on interest. That goes for business loans or company credit cards. Be sure to include this in your form, as this can reduce what you owe by a significant margin.
Other than these purchases that apply to most freelancers, there are still plenty of other potential deductions that you should be aware of when filing or preparing your taxes.
Things To Avoid
The first time doing your own taxes as an independent is often scary. There are a few key mistakes to avoid in order to prevent any problems with the IRS.
This one should go without saying, but it is a common mistake. False information on a tax form can come with serious charges.
Be sure that you are calculating all of the revenue properly. Tax fraud is a serious charge. There are a lot of common reasons for IRS audits to be aware of, you be extra careful when adding income and expenses.
Missing Opportunities to Save
Make sure you know everything you can write off on your taxes so you aren’t paying more than you need to pay. Do what you can throughout the year to record and track your expenses, and make sure you have what you need when it’s time to file.
On the other side of the coin, you should avoid going overboard. That means don’t write things off unless you have verified that they are accepted business expenses by the IRS. That’s asking for an audit.
Helpful Tips for Later
If you finish filing your taxes, you aren’t done quite yet. There are always next year’s or next quarter’s taxes that should be kept track of consistently. Not only that, there’s always a possibility of something going wrong. Here’s what to do.
Want To Save More Next Time?
If you’re reading this, it’s probably because you’re preparing to do your yearly or quarterly taxes. Well, if you are going to be continuing this career path, you are going to want to save as much as possible next time.
There are plenty of apps you can use throughout the year that can track your revenue and expenses, and even your mileage by tracking your location. They will typically require a small monthly fee, but they will save you in the long run.
For example, most tax apps will allow you to link to your bank account and just track all of your transactions. Whether it was income, a business expense, or personal expense, it’s nice to have that ready.
Typically, you can upload pictures of your receipts onto the app to make it easier, as it will automatically upload these expenses when it’s time to file.
If you do not want to use an app, simply having a folder in your phone with pictures of your receipts is an easy way of keeping track. Simply using a spreadsheet on your computer can save you.
Overall, it comes down to being more diligent throughout the year. If you are able to find a better way to keep track of these expenses once you know what you can deduct, you will be much better off.
If Something Goes Wrong
No matter how much preparation you do, there is always a chance of something going wrong, leading to an audit.
If the IRS audits you because of a mistake on your tax form, or if you need defense, this is no time to play around. Get a free consultation with trusted tax attorneys for the best representation you can get.
Hopefully, this guide will give you the tools you need to nail your tax filing and prepare you for your next fiscal year or quarter.
We know that filing your self-employed taxes can be frustrating, confusing, and even dangerous. Now that you know about freelance taxes, just be sure to remain extra careful when filing. If there are any mistakes, it could cost you.
Luckily, we offer legal representation for people who need help under audit. Check out our audit defense services and get started today!