Freelancer Taxes – A Comprehensive Guide
Freelancers do not have their taxes withheld from their income like salaried employees do, so it is necessary for them to make estimated tax payments quarterly and keep an accurate record of expenses & revenues as freelancers.
Many of the expenses incurred when running your freelance business are tax deductible; thus, proper bookkeeping & documentation may save money come tax season!
1. Paying Self-Employment Taxes
Freelancers must pay both federal and state income taxes. Depending on their taxable income, freelancers may have to make quarterly estimated tax payments or file an annual return with the IRS. As an effective strategy, freelancers should set aside 25-30% of each paycheck for taxes in a separate savings or bank account.
Freelancers must also pay self-employment (SE) taxes. These include Social Security and Medicare taxes that must be paid on top of federal employment taxes. Thankfully, the government offers many deductions that can help freelancers lower their taxable income and thus pay less in taxes overall. In order to claim as many deductions as possible it’s essential that freelancers document and keep track of business expenses.
Establish a bank account dedicated to freelance work so you can easily track expenses and deposits. In particular, freelancers can deduct travel costs, meals with clients, advertising costs and website creation expenses as deductible expenses – just keep in mind that the IRS requires any expense be both ordinary and necessary for running their business. While being required to file income and self-employment taxes may come as a shocker at times, filing can actually become part of running your business with proper planning and preparation.
2. Filing Self-Employment Taxes
As a freelancer, one of the biggest learning curves comes when they realize they must pay both income tax and self-employment tax payments. Since no employer withholds these taxes directly from paychecks like they would with traditional employees, freelancers must estimate and set aside quarterly tax payments themselves.
To do so effectively, freelancers can open a separate bank account and depositing a percentage of every payment into it – this way, freelancers can be sure that there will be enough money for estimated taxes when tax season comes around.
Once you’ve established a system to collect and record business income and expenses, it is time to file your taxes. As a freelancer, this includes filling out IRS Form 1040 with Schedule C: Profit or Loss From Your Business and Schedule SE: Self-Employment Tax forms as well as any relevant state/local forms. Furthermore, be sure to maintain detailed records for any deductions taken in case audited by the IRS.
Filing taxes may seem intimidating at first, but with practice it will become part of your routine as a freelancer. Bonsai makes filing taxes easier by automatically tracking estimated tax payments and sending reminders for upcoming filing dates.
3. Deducting Business Expenses
As a freelancer, you are entitled to numerous tax deductions that will reduce your taxable income and save money at tax time. However, it’s essential that you carefully read through the IRS’ guidelines so you know if each expense qualifies and have adequate documentation of it.
Filing for a home office deduction requires making sure that your work area is dedicated solely and regularly to business use, not entertainment or social use. Meal expenses only qualify if related directly to conducting business (i.e. you cannot deduct Sunday brunch if meeting clients there).
Freelancers also can take advantage of various tax credits to help lower their taxable income at tax time. One such tax credit is the self-employment tax credit, which can reduce it up to 25% of your taxable income. Another available to freelancers is the Work Opportunity Credit which can be claimed if hiring employees or interns.
Filing taxes may not be enjoyable, but knowing how to file as a freelancer and which forms to utilize can make the process simpler and less taxing. Furthermore, taking advantage of all available deductions and credits will reduce your taxable liability come April 18th (this year it’s April 18th). A professional tax preparer can provide expert guidance to maximize deductions and minimize taxes bill.
4. Keeping Business Records
As a freelancer, keeping meticulous records is critical for filing taxes and claiming deductions. Doing so makes the preparation of returns much simpler; one of the biggest mistakes freelancers make is failing to track income and expenses throughout the year – this can cost them dearly later as they may forfeit valuable tax breaks such as business mileage deductions.
Freelancers receive a 1099-MISC form from each client who pays them $600 or more, to report all freelance income. To avoid a big headache come tax time, keep track of receipts and expenses regularly so they can all be included on Schedule C when filing returns – doing this can save money in accountant fees as well as time spent going through documents to file returns.
Freelancers must file both federal and state income tax returns. While employees’ employers typically deduct taxes directly from paychecks, freelancers must file estimated quarterly taxes via IRS Form 1040-ES to help the IRS calculate how much tax will owe at year’s end – paying estimated taxes regularly will help avoid an unexpectedly large bill come April 15.