One of the most daunting administrative tasks freelancers must handle is filing taxes. But if you get it right, it will feel like a breeze!
It all starts by knowing your income and expenses throughout the year. It also means keeping your business records up to date.
Know Your Income
So, how to file freelance taxes? As a freelancer, it’s essential to know what your income is before you file your taxes. It will make estimating your tax bill easier and determining what you can do to save money come tax time.
Freelancers can often need clarification about their taxable income because it fluctuates. One month’s earnings could be more than the next, so it’s essential to create a budget and stick with it.
Once you’ve figured out your taxable income, taking advantage of tax deductions that lower it is a good idea. These tax breaks can save you a lot of money, and as a freelancer, you have many options to take advantage of them.
For example, you might qualify for a tax credit for your health insurance or childcare expenses, which can lower your taxable income. You can also claim the business expenses you incur for running your business, which can also reduce your taxable income.
The IRS’s progressive tax system uses brackets to determine your tax rate. Your tax rate increases with your income.
If you’re a new freelancer, it’s a good idea to work with a tax professional to help you determine your taxable income and estimate how much you will owe at the end of the year. They can also help you prepare your taxes only to pay what you should.
Know Your Deductions
As a freelancer, you must know your deductions to maximize your tax savings. The IRS treats freelancers as businesses, so you can deduct expenses that are both ordinary and necessary for the operation of your business.
For example, if you travel to take photographs for clients or conferences, you can claim your travel costs as a business expense. Also, you can deduct the cost of your business website (if you have one), including hosting and domain fees.
You can also fully deduct online subscriptions and tools that help you run your business, from accounting software to social media management apps. But be sure only to deduct the cost of items necessary for your business, not just those you use because you like them.
Some business deductions are “above the line,” meaning they are reported before taxes are calculated on adjusted gross income. These include health insurance premiums if you’re self-employed, some student loan interest, and contributions to specific retirement plans.
But a few deductions are “below the line,” which means they are listed after adjusted gross income is calculated. These include business expenses such as computer equipment and office supplies.
Knowing your tax deductions can make filing your taxes a breeze for many freelancers. The trick is to keep track of all your deductions throughout the year so you can quickly and easily claim them on Schedule C attached to your tax return.
Know Your Taxes
Freelancers have a unique tax situation. They can claim various deductions that employees can’t, and they must report all their income.
For this reason, freelancers need to know their taxes to file their returns correctly and avoid a tax audit. According to Suzanne Vanzant, owner of Professional Public Accountants in Miami, Florida, there are several red flags that the IRS can spot in a freelancer’s tax returns.
One of these red flags is claiming too many business expenses in the form of tax deductions. These deductions are only allowed if they’re ordinary and necessary for the business.
Another example is writing off travel and transportation costs for your business. The IRS has standard mileage rates that you can use when calculating your business expenses.
You also need to be aware of how your clients pay you. Some clients don’t need to send you a 1099-MISC, but you still have to report all payments of $600 or more on your tax return.
You’ll want to file your freelance tax return by April 15 each year. This is when you list your freelance income in Part I of your return and your deductions in Parts II-V.
Know Your Options
If you’re a freelancer, you must know your tax filing options. The key is to set aside money in a separate account annually and use those savings for your quarterly taxes.
Freelancers also need to keep a log of all their business expenses. This is essential for claiming deductions that can help reduce your tax bill.
There are several deductions that freelancers can take, including car mileage, medical expenses, and office supplies. These are important to include because they can lower your total income and save you a lot of cash in the long run.
Another big mistake many freelancers make is not keeping reasonable business expenses and income records. These are crucial for claiming deductions and avoiding an audit from the IRS.
You should also gather all the 1099-MISC forms you receive from clients that paid you more than $600 during the tax year. Most businesses send these to freelancers by January 31, so you must have them on hand.
Aside from the regular income tax, there’s a self-employment tax that most freelancers must also pay. This is 15.3% of your total income and is meant to cover social security and Medicare taxes.
Some tools can help you track your finances and prepare taxes efficiently, including apps connecting to your business bank account and third-party processors like PayPal or Stripe. These tools can help you calculate your estimated taxes and streamline your tax prep.
