Nearly 58 million Americans did freelance work in 2018, according to recent reports. As tax season rolls around, all of those independent contractors are preparing to balance their books and pay the appropriate amount to the IRS by the dreaded tax day of April 15th.
If you’re a part of the burgeoning gig economy and trying to navigate the complicated world of taxes, follow these seven freelancer tax tips.
1. Work with a Tax Professional
This is not shameless self-promotion as a tax professional. Taxes are complex, especially if you’re a new freelancer, who’s only ever filed as a standard W2 employee. Spending even an hour with a CPA will help you to make sure you’re setting the proper foundation for self-employment, that you’re taking the right deductions, and paying the correct state and federal rates. Plus the cost of paying a tax professional is a deductible expense for the following year!
2. You’re Paying Double the Amount of Taxes Than W2 Employees
If you earn more than $400 in freelance income throughout the year, you need to pay taxes on it. As an independent contractor, you’re required to pay regular income tax, (rates vary by state and income level), as well as a self-employment tax of 15.3 percent. According to the IRS, this rate consists of two parts: 12.4 percent for social security and 2.9 percent for Medicare. Basically, you’re paying both the employer and employee tax—the freedom of freelance work comes at a price!
3. Plan to Pay Quarterly Taxes Based on Projected Income
For full-time freelancers, you should plan on paying quarterly taxes. Quarterly payments are based on your estimated income, minus your expenses. If you have a full year of freelancing under your belt, you can calculate this based on the previous year. If you don’t have steady gigs, it might seem overwhelming to guesstimate your income for an entire year, but err on the side of caution. By the end of the year, if you pay more in taxes than you needed to, you’ll get a refund or apply it to the following year. If you pay less than you were supposed to by more than $1,000, you can be subject to a fine.
If you’re meeting with a tax professional be prepared with your projected 2019 income and expenses. Your CPA will use this to determine your quarterly taxes.
The due dates for quarterly taxes are:
- April 15th
- June 15th
- September 15th
- January 15th
4. You Need to Report All Income
Any organization that pays you more than $600 in a calendar year is required to send you a 1099-MISC tax form by January 31st. These are the forms that you’ll use to support your overall income while filing taxes. However, you might accept smaller projects or payments throughout the year, especially if you work on project-based websites like Upwork or Fiverr. Just because it was less than $600 and you didn’t receive a 1099, doesn’t mean that you don’t have to report it as income. You are required to report any income that you take in and pay the applicable taxes.
If you accept payments through freelance platforms, you can always use your reports from the system to estimate total income. Most platforms will provide you with a 1099-K from if you make more than $20,000 in a year.
5. Consistently Manage Your Books
Don’t procrastinate, keep track of your income and overall finances throughout the year. You don’t want to leave it all until a week before your quarterly payments are due. This can cause undue stress and mistakes. Manage your books as you go, that way it will be easy to keep on top of your accounting and pay taxes each quarter. If math isn’t your strong suit, consider using an accounting or bookkeeping software. These automated tools are user-friendly and much easier than your basic spreadsheet.
6. Expenses Are Your Best Friend
Any expenses that can be attributed to the cost of running your self-employed business can be used as a deduction on your overall income. To put it simply, if you make $60,000 in a year, and spend $10,000 on business expenses, you only owe taxes on $50,000. Common expenses for freelancers are:
- Home office costs (even a portion of your rent), supplies and equipment
- Business travel and meals
- Internet costs
- Cell phone bill
- Any marketing or advertising for your freelancer services
- Health insurance premiums
- Professional development costs (classes, accreditations, training programs, networking events)
- Software or subscription costs
- Mileage for business-related trips
Again, with expenses, keep track as you go. Some accounting software has expense tracking, but also consider downloading an expense tracker app, where you can automatically snap a picture or a receipt. It’s important to have receipts in case of a future audit.
7. Saving for Retirement Will Also Save You Money on Your Taxes
In 2019, if you’re contributing to a traditional Roth IRA, you can deduct up to $6,000 on your annual income. Which means that’s not only $6,000 you’re putting towards your retirement but also income that you’re not taxed on.
To put that into easy numbers, say you’re making $60,000, your total combined tax rate is 30 percent, and you put $6,000 into a traditional Roth IRA in 2019. You’ll save $1,800 in total on taxes for that year.
Remember that $6,000 is just the annual limit, that might not be feasible depending on your income level and expenses, but every contribution will help you in the long run with retirement and reduce your taxable income.
8. Take Charge of Your Taxes
Preparation is key when it comes to managing your accounting and understanding your taxes as a freelancer. Make sure that you’re proactive, you understand the federal, state, and local tax rates. Use accounting and expense-tracking tools throughout the year. If you need help, consult a tax professional.
