“I love doing taxes,” said no one, ever—except maybe accountants.
But freelancers aren’t accountants. They are writers, Uber drivers, graphic designers, shift workers and others who may not have learned how to do taxes growing up. As a result, taxes can feel like an overwhelming task to tackle, whether it’s your first time filing as a freelancer or your fifth.
Thankfully, New York City–based enrolled agent and certified financial planner Susan Lee, who has helped freelancers and creatives with their taxes for decades, has a suggestion. “How you frame doing taxes [is what] really matters,” Lee says. For example, viewing your taxes as a time-consuming duty to check off your list will make it seem like a chore. But “if you frame it as something that will help your business thrive, then it’s easier.”
Lee lists the following benefits of doing your taxes:
- You may discover expenses that have been billed twice by mistake. You’ll see these when inputting expenses into your accounting software or spreadsheet or when reviewing your transactions.
- You can determine expenses to cut. When you’re inputting or reviewing your expenses as part of your tax preparation, you’re paying more attention to them and can even consider whether you really need to spend money on certain items or services.
- You’ll learn when dips in your income occur after keeping track of your revenue for a few years. If those decreases are a natural part of your business, such as seasonality, monitoring them may help you decide to plan a vacation or time off during that period. You can also plan to save more before the dips occur to make up for less revenue during that time.
The biggest benefit of doing taxes is keeping tabs on your business’s financial health. But even with these benefits, tax filing can still be daunting. This guide is chock-full of tips and tricks to make the process easier.
When Are You Required To Pay Taxes As A Freelancer?
“[Anybody who’s a] freelancer… self-employed or an independent contractor… [and is] doing work and not having taxes taken out before they get their [payment, if they have a profit, likely needs to pay taxes],” says Brass Taxes founder and president Rus Garofalo, who provides financial and tax advice for creative individuals who accidentally become businesses.
Making a profit is the key. You only have to pay self-employment tax if you make a profit of $400 or more.
When you’re a freelancer, you’ll need to file quarterly estimated taxes, as well as an annual return.
4 Big Differences Between Being Taxed As A Freelancer And As An Employee
As an employee, you got your paycheck and might have seen taxes taken out, but you probably didn’t think much about your taxes until right before you had to file them each year.
When you become a freelancer, taxes require more attention. Understanding the ways taxes impact your business will not only help prepare you for your tax preparation, but will also set you up for success in your business.
Here are the major differences freelancers need to know about taxes:
1. You’ll Be Taxed As A Business Entity
In addition to filing your personal taxes, you’ll also have to file as a business.
You can choose to be a sole proprietor, LLC, or S corporation. The simplest way to file is as a sole proprietor, which is why many freelancers choose it, although that’s not even necessary.
If you start working as a freelancer without forming an LLC or corporation, you’re automatically considered a sole proprietor.
There are some tax and liability advantages for LLCs and S corporations, but they also require more fees and business tax forms. Talk with your accountant or tax adviser to determine the best entity to go with for your business.
2. You’ll Pay More In Taxes Than You Did As An Employee
You’ll pay a 15.3% tax rate as a self-employed person, which includes 12.4% for Social Security and 2.9% for Medicare. You will be able to deduct half of that, or 7.65% of self-employment taxes.
The 15.3% self-employment tax is in addition to local, state and federal income taxes. Those will vary depending on where you live. New York City freelancers, for example, would be subject to local, state and federal income taxes. Self-employed workers in Florida have no local or state income tax and will only pay federal income taxes.
“A good rule of thumb is to put aside 25% of your earnings to pay for your taxes,” Garofalo adds.
Yikes! But there’s good news, too.
3. You’ll Be Able To Deduct Business Expenses From Your Revenue Before You Pay Your Taxes
These are some common deductible freelance expenses:
- Advertising
- Books, magazines and reference materials
- Business insurance
- Business meals
- Continuing education—including business-related workshops and seminars
- Equipment and depreciation—including computers, cellphones and office equipment
- Gas and electric
- Health insurance (if you pay for it yourself)
- Home office
- Legal and professional fees
- Memberships for professional organizations
- Office rent
- Office supplies
- Retirement savings
- Software
- Subcontractors
- Tax preparation and self-employment tax
- Phone and internet bills
- Work-related transportation—Ubers, cabs, subways, buses and mileage
- Travel
Some of these deductions, including business meals, home office costs and retirement savings, are a little more complicated to determine. Your accountant can help you with that, or you can learn about them in the IRS Tax Guide for Small Business. You’ll include those deductions on your Schedule C tax form, which you attach to your annual 1040 personal tax return when filing as a sole proprietor.
4. You’ll Need To Pay Quarterly Estimated Business Taxes—Federal, State And Local
As an employee, you had taxes taken out of your paychecks and only needed to file an annual tax return. When you’re a freelancer, you’ll need to file quarterly estimated taxes, as well as an annual return. Each quarter, you’ll need to fill out an estimated tax form for the IRS (Form 1040-ES), as well as forms for your city and state (if applicable), and pay those estimated taxes.
To determine your estimated taxes, calculate the net income (revenue minus expenses) you expect to receive each quarter. This may be more difficult when you’re first starting out. After you’ve been in business longer, you may be able to use prior years’ estimated quarterly tax numbers as a guide. But be warned—there are penalties for not paying your estimated quarterly tax payment on time.
Here is the filing schedule:
- April 15–for income earned January through March
- June 15–for income earned in April and May
- September 15–for income earned June through August
- January 15–for income earned from September to December
April 15 is also the deadline for annual tax returns.
Tax Preparation: Keeping Track Of Your Expenses And Revenue
Technology has made it much simpler to keep track of your income and expenses. It’s so much easier than dumping receipts and bank and credit card statements in a box and manually going through each piece of paper every quarter.
Here are some tools that will make your tax preparations much easier:
- Business bank accounts with online access
- A business credit card with online access
- Accounting software
Here are the advantages of using each of these tools:
Business Checking And Savings Accounts
Tax preparation is all about organization, and keeping your business and personal finances separate is the first step. With a separate business checking and savings account, you’ll be able to easily track money coming in and out of your business.
Online business checking and savings accounts can also connect to accounting software programs. Each transaction is automatically uploaded to your tax software, eliminating the need for you to input each income or expense manually. That makes it easier for you and saves you time.
Your business checking account can serve as the primary place for all of the money coming in and out of your business. A business savings account is a great place to park the money you’ve earmarked to pay for taxes.
Business Credit Card
Using a business credit card for all or most of your expenses is an easy way to capture all of your deductions in one place.
Just as you can connect your online business checking and savings accounts to your tax software, you can also connect it to your business credit card account. Each of your expenses will be automatically uploaded to your tax software.
Accounting Software
Tax preparation is just one way that accounting software can help your business. This software also allows you to record your daily money in and out, as well as invoice customers and manage projects, so you can determine your company’s financial position at any time.
There are many accounting software options available for freelancers. Common ones include Wave, FreshBooks and Quickbooks. All three offer a free 30-day trial, and Wave offers a standard free option with limited features. It’s worth taking each for a spin to get a better feel for what might work for you.
These programs also allow you to connect your business bank accounts and credit card. Expect to pay $16–$30 per month for these options—although initially, those amounts may be less due to promotional pricing.
There is a learning curve for all of this software. Each company offers free support, but this support varies by hours and by type (phone, video, chat or email). Some even offer additional help for a fee. For example, the Wave Advisors program provides bookkeeping support and one-on-one accounting and payroll coaching.
Filing Your Taxes
Just like your personal tax filing, you can choose to handle your freelance tax process yourself or have an accountant or tax adviser help you. Using accounting software makes it easier for you, as well as for accountants and tax advisers, to access your tax information, fill out forms and send in the paperwork.
If you decide to file your own quarterly and annual business taxes, you can use software like TurboTax to make filling out the forms easier. When it’s time to submit your forms and payments, you may be able to set up an electronic connection with the IRS and your state and locality, or you may have to send the forms and funds in by mail. The IRS also offers free filing programs if you don’t want to buy software.
Many freelancers choose to work with accountants or tax advisers. It’s a smart idea to choose someone who is familiar with your industry or has worked with freelancers before. Ultimately, work with somebody you feel comfortable with.
You may want to work with a local accountant in person or online. If you work with someone who is not local, make sure they are familiar with the tax rules in your city and state. Brass Taxes, for example, works with freelancers in all 50 states and in some other countries. To find a tax adviser, ask other freelancers who they use and recommend.
While you still may not love doing taxes, we hope these tips will make your tax preparations easier.
This article originally appeared in the September issue of SUCCESS+ digital magazine.
Photo courtesy fizkes/Shutterstock
