By Adria Saracino
To the new and veteran freelancer alike, tax season can be a time of dread. While there are many tax benefits to be taken advantage of, it can be difficult to navigate the maze of regulations surrounding each deduction–not to mention you have to make sure you’re sending all of the correct forms to the correct places.
But it doesn’t have to be a complete headache — not with the right resources. That’s why we’re recommending the seven tips below, which cover all of the essentials, as well as the documents available in this extensive tax resource center. With these two sources, you’ll find answers to all of your most burning freelancer tax questions — and a few you didn’t even know to ask.
1. Know What Taxes You’ll Need to Pay
If you’ve ever worked directly for an employer, you’re probably used to paying income, social security and Medicare taxes. As a freelancer, you’ll also need to pay a self-employment tax. This is because you are your own business, and therefore have to match your tax contributions in the same way your employer would have, for a total contribution of 15.3%. That’s 12.4% for social security and 2.9% for Medicare tax.
You’ll also have to pay an income tax, for which you can use your last year’s rates as a guide, or you can check the IRS site for income bracket cutoffs. Lastly, it’s important to check with your state revenue department and municipality to determine whether or not they are expecting taxes from you as well. For most freelancers, you will make the bulk of these payments in the form of estimated taxes at the end of every quarter — that’s the 15th of every January, April, June and September — using form 1040-ES.
2. File the Correct Forms
Every time a new client hires you as a contractor, they will have you fill out a W-9. That’s so that when tax season rolls around, they can send you a 1099, which will state the amount of money they’ve paid you. Note: You won’t receive this form for total income of less than $600.
You may be used to filing a 1040A or 1040-EZ form; as a freelancer, you’ll have to switch back to the original 1040 form, as you’ll be reporting self-employment income. To account for taxes related specifically to your business you will also need to file a Schedule C, though those with relatively simple businesses like writers or graphic designers will be fine filing a less complex Schedule C-EZ.
Lastly, you will need to calculate your self-employment tax on Schedule SE form.
Note: These forms and types of taxes paid will differ slightly for freelancers who have filed as a corporation — something all freelancers should consider for tax and liability purposes — but that is an article unto its own.
3. Take Advantage of Deductions
Now for the fun part! There are a number of juicy deductions available to freelancers. That said, it’s important to know the difference between what counts as a business lunch and what counts as a “ridiculous splurge that will anger the IRS.” And we can’t say it enough: keep your receipts.
- Office Supplies: From the furniture in your office to that colorful new packet of Post-Its, office supplies are fully deductible. However, if you’re just starting out, you may want to brush up on the differences between current and capitalized expenses.
- Advertising and Internet Expenses: Billboards, fliers, leaflets, online ad campaigns, and the internet connection itself. Add the expenses up, and deduct away.
- Professional Services: Whether you’ve employed a bookkeeper to keep track of your finances or you’ve taken a continuing education course to further your career, the costs you paid are all deductible.
- Insurance: If you have business insurance, it’s fully deductible. Health insurance is as well on form 1040 as an adjustment to income.
- Home Office: You can deduct a percentage of your rent and utilities, based on the size of your home office.
- Travel: If you travel to clients, track your mileage for a deduction at the 2012 rate of 55.5 cents per mile. Travel for business trips is also deductible, as are any meals and hotel rooms related to business travel.
This is just a sampling of the deductions available. You’ll find a more extensive guide here.
4. Be Wary of Audit Red Flags
One big caveat to all of these deductions: the IRS keeps its eye on freelancers for any kind of fudging, so you’ll want to make sure you’re not setting off alarm bells. A few common triggers include:
- The Home Office Deduction: This is by far one of the most commonly abused deductions, partially because the regulations concerning just what you can and cannot claim are both strict and a little difficult to understand. The gist of it is that the area you claim as a home office needs to be used exclusively for business, and you need to stick quite tightly to obvious borders. Read more about these regulations in IRS Publication 587.
- Mileage: While we highly recommend you deduct mileage, if you use your car for both business and pleasure, you’ve got to do a good job of tracking and separating the two. Keep in your car a little book with columns for start and end mileage, date, and description.
- Meals and Entertainment: Again, deducting for this is perfectly acceptable, as long as it’s within the realm of reason. Deducting for a good meal with an important contact is fine, but perhaps not if it costs several thousand dollars. Use a good dose of common sense to avoid this trigger.
5. Sign Up for Electronic Filing
Repeat after us: filing your taxes electronically will make your life infinitely easy. Through the Electronic Federal Tax Payment System, youâll even be able to file your estimated taxes. It takes a little time to set up, but will be well worth it in the end.
6. Use Tax Software Made for Businesses
Likewise, tax software can make your life so much easier, as can accounting programs that automatically create reports and forms for you. File for free through the IRS, or compare a number of good tax programs here.
7. Hire an Accountant
You’re in business for yourself, and you may very well enjoy being totally self-sufficient. But hiring an accountant can mean outsourcing many of these steps. It can also ensure you’re not missing anything, especially in terms of new tax laws. Lastly, a good accountant will find you deductions and loopholes you could have never known existed (unless you wanted to read through a mass of byzantine tax documents in your free time…). All of these things make hiring an accountant an expense that pays for itself, at least in the beginning of your freelance years. Just make sure to do so early before they book up.
Filing taxes as a freelancer can be complicated, but doing so allows for numerous personal benefits. Take the time to learn the regulations and get to know the forms so you can take advantage of all there is to offer and also cover all of your bases.
Still Confused? Check Out This Tax Checklist
- _____ Pay social security and medicare taxes (15.3% of income)
- _____ Pay estimated taxes throughout the year using IRS form 1040-ES by the 15th of January, April, June and September.
- _____ File a 1040 form.
- _____ File a Schedule C or Schedule C-EZ.
- _____ File a Schedule SE form.
- _____ Carefully track and claim all deductions. Keep all receipts and avoid classic audit red flags.
- _____ Sign up for the Electronic Federal Tax Payment System.
- _____ Buy tax software.
- _____ Consider hiring an accountant.