When you are a freelancer, you have a whole host of tax issues that you have to deal with that those who simply bring home a paycheck from an employer do not face. It is important to understand your responsibilities- but also your rights – in order to make sure you are paying your taxes in full and on time, but not paying more than you should be required to pay.
If you are working as a freelancer, here are a few key tax tips that can help you to ensure you are making smart choices so you’re prepared when it’s time to file taxes online:
- Understand your quarterly filing obligations. The United States income tax system requires you to pay-as-you-go, which means you have to pay your taxes several times throughout the year rather than making a big payment at the end of the year. Most people don’t need to worry about this because their employer automatically deducts the money they owe in income taxes right from their paychecks. However, freelancers who work for themselves need to make quarterly estimated payments. The IRS provides details on how to pay estimated taxes on its website and explains the penalties that can result from underpayment.
- Make sure you have the right business structure. Depending upon the type of freelance work that you are doing, you may be organized as a sole proprietor, a partnership or as a corporation. Tax options such as forming an S-corporation can allow you to save on taxes under some circumstances because you are able to count a portion of the income the business generates as a distribution that you are paid as a return on investing in your business, rather than as ordinary income. Forming an S-corporation could allow you to save by paying less in social security and payroll taxes. The U.S. government Small Business Administration provides more information on S-corporations and how they impact tax status.
- You- and the IRS- will get a 1099 reporting your income. The money that you are paid as a freelancer will generally be reported on a 1099. Clients who pay you more than $600 are required to send a 1099 and must also send the form to the Internal Revenue Service as well. You should expect that if your income tax you report doesn’t match the 1099s you receive, the IRS will want to know why. As such, it is very important to keep careful track of all of the 1099s you receive and to report all of the income. You should also be aware that the income needs to be reported even if you earn less than $600 from one employer and do not receive a 1099.
- You may have a variety of tax write-offs available to you for business expenses. Freelancers generally provide more of their own office equipment and supplies than do people who work for employers. It is important to ensure that you are getting the full deductions available for all of the money you spend on business expenses and equipment. Keep receipts of all of your spending on products that you use for your business over the course of the year so you can include all of these expenses in your deductions. Remember, though, that the expenses need to be legitimate business expenses. If you buy a computer for work, that is a business expense. If you buy a computer to play games and send emails but use it only occasionally for work, you cannot claim the full value of the computer as a business deduction.
- You may have a home office deduction. If you work from home and you have a dedicated office to do it, you can take a home office deduction for a portion of your mortgage. You must make sure that you really are using the home office as a dedicated space in which you do business and not for other purposes, as this deduction can send up red flags to the IRS and you may be called upon to prove that you really are using the office correctly.
- Explore your self-employed retirement options. Those who are self employed freelancers don’t have an employer 401K to pay into. As such, you need to take care of your own retirement. There are a number of tax-advantaged retirement accounts you can consider looking into that will save you on your taxes including a SEP-IRA and a self employed 401K.
By following these tax tips, you can ensure you fulfill your tax obligations without paying out more money to the government than you are required to pay.
About the author:
Eric Bukowksi is a freelance web designer who learned the hard way about the importance of taking care of your taxes properly as a freelancer. Aside from that Eric designs websites, logos, print, pretty much anything small businesses need in terms of design.