Updated: Feb 23
Like it or not, you are not exempted from paying your taxes as a freelancer. The earlier you realize this the better for you.
If you are a freelancer trying to navigate the world of taxes, it can be a confusing and intimidating process, especially if you're new to it. Trust me, I've been there.
I remember my first year as a freelancer, I had no idea what I was doing and ended up making some serious mistakes when it came to my taxes. The end result was me paying higher than I owed albeit how small it was.
Don't let that happen to you! It's important to stay on top of your taxes as a freelancer and make sure you're doing everything correctly. In this guide, I'll walk you through the process and give you some tips to make sure you're all set when tax season rolls around.
Understanding your tax obligation as a freelancer
As a freelancer, it's important to understand your tax obligations in order to avoid any issues with the IRS or the tax authorities in the country where you operate. Failing to pay your taxes on time or accurately reporting your income can lead to penalties, interest, and even legal problems. Here are some key things to know about your tax obligations as a freelancer:
You may need to pay estimated taxes: If you're self-employed and expect to owe at least $1,000 in taxes for the year, you'll need to pay estimated taxes. This includes income that you earn as a freelancer, as well as income from other sources such as investments. Estimated taxes are typically paid quarterly, and the due dates for each payment are April 15, June 15, September 15, and January 15 of the following year.
You'll need to pay self-employment tax: As a freelancer, you're considered self-employed and are responsible for paying self-employment tax. This includes Social Security and Medicare taxes, which are typically withheld from a traditional employee's paychecks. As a self-employed individual, you'll need to pay these taxes yourself, at a rate of 15.3% in the US on the first $142,800 of your net earnings (as of 2021).
You may be eligible for credits and deductions: While being self-employed means you have additional tax obligations, it also means you may be eligible for certain credits and deductions. For example, you may be able to claim deductions for business-related expenses such as supplies, equipment, and home office expenses. You may also be eligible for credits such as the Child and Dependent Care Credit or the Earned Income Credit.
You'll need to file a self-employed tax return: If you're self-employed and your net earnings are $400 or more, you'll need to file a self-employed tax return (Form 1040-SE). This is in addition to any other tax returns that you may need to file, such as a personal income tax return (Form 1040).
It is important to note that the tax obligations for freelancers can vary depending on your specific circumstances and the state you live in. We strongly advise that you consult with a tax professional or the IRS for more information on your specific tax obligations.
Keeping track of your income and expenses
It is essential to keep track of your income and expenses in order to accurately report your earnings and claim deductions on your tax return. Here are some key things to know about tracking your income and expenses as a freelancer:
Keep detailed records: Keep detailed records of all your income and expenses throughout the year. This includes keeping receipts, invoices, and any other documentation that supports your income and expenses. You'll need this information when the time comes to file your tax return.
Use a separate business bank account: Consider opening a separate bank account for your business to keep your personal and business finances separate. (You can open one here) This can make it easier to track your income and expenses and provide a clear record for tax purposes.
Use accounting software: There are many accounting software options available that can help you track your income and expenses. These tools can automatically categorize your transactions, generate reports, and even send invoices to your clients. Some popular options include QuickBooks, Xero, and Zoho Books.
Keep track of mileage: If you use your personal vehicle for business purposes, you may be able to claim a deduction for the mileage. Keep track of your business miles using a mileage tracker app or by keeping a log of your trips.
Know what expenses are deductible: As a freelancer, you may be able to claim deductions for certain business-related expenses. These could include supplies, equipment, home office expenses, and more. However, it's important to note that in order to claim a deduction, the expense must be ordinary and necessary for your business.
When you keep accurate records of your income and expenses, you'll be better prepared when it comes time to file your tax return. This will help you accurately report your earnings and claim any deductions that you're entitled to. With careful record-keeping, you can ensure that you're paying the correct amount of tax and potentially save money on your tax bill.
Filing your tax return as a freelancer
It's tax time for freelancers! Here's what you need to know:
File your self-employed tax return: If your net earnings are $400 or higher, make sure to file a Form 1040-SE in addition to any other required tax returns. This form covers your business income and expenses, as well as any self-employment tax owed.
Don't forget about estimated taxes: If you're expecting to owe at least $1,000 in taxes for the year, you'll need to pay estimated taxes quarterly on the 15th of April, June, September, and January. This includes income from freelance work and other sources like investments.
Get help if you need it: Filing taxes as a freelancer can be overwhelming. Consider using tax software like TurboTax or H&R Block, or hiring a tax professional for assistance.
Mark your calendar: The deadline for filing your tax return is April 15th, but if you need more time, you can request an extension. Just remember to pay any taxes owed by the deadline to avoid penalties and interest.
Don't let taxes stress you out - with a little preparation, you can breeze through the process and get everything done on time.
Final thoughts
Filing taxes as a freelancer can seem daunting, but with a little organization and the right resources, it can be a smooth and stress-free process. Whether you use tax software, hire a professional, or seek assistance from the IRS, there are plenty of options available to help you get your taxes done accurately and on time.
Remember, filing your taxes is an important responsibility that can have a big impact on your financial well-being. It's worth taking the time to do it right so that you can maximize your refund or minimize any taxes owed.
So don't be afraid to ask for help if you need it, and don't procrastinate - the sooner you get your taxes done, the sooner you can put that task behind you and move on to other important things.