There are a lot of great things about freelancing. But doing taxes? Not so great.
If you’re working as a freelancer and are an independent contractor (that is, you deposit your earnings directly to your personal bank account and don’t have a S Corporation or LLC for your freelance business), tax season and saving money away for quarterly deposits can be hard. But there are a few things that can make freelance taxes much easier.
First off: Most freelancers don’t realize just how many deductions they are allowed to apply to these taxes. These deductions can substantially reduce your tax liability. Secondly, the IRS isn’t a great big villain: They just want people to pay their taxes. A little bit of paperwork and strategy up front can make paying your taxes much easier come April 15.
Being Organized Is Awesome
Freelancers and independent contractors are more than architects or writers or designers or personal trainers: They’re folks who double as workers and as their own bosses.
This means that you have to do something all good bosses do: Keep track of paperwork and be organized. Keep a separate folder in your file cabinet (You have one, right? RIGHT?) for tax deductible receipts or scan them into a service like Evernote or OneNote.
In addition, you’ll want to keep detailed lists of all your business expenses from the post year. This means using a finance tracking tool such as YNAB, Mint, or Quicken. This means that every week or two, you’ll want to enter all your business earnings and expenses into your computer or phone. Enter how much you spent, what the date ways, the recipient of your money, and why you purchased the item.
So why does this matter for freelancers? Simple: Sweet, sweet tax deductions.
Tax Deductions For Freelancers
Many of the following can be tax deductible (And we strongly suggest speaking to a tax professional about this):
- Office rent or coworking space fees
- Rent for your home office
- Interest on your business credit card (You have a separate credit card you use just for freelance expenses, right?)
- Business cards, membership on networking services like LinkedIn, and online ads on Facebook, Google AdWords, and other platforms
- Computers, cameras, or tablets used for work purposes
- Meals and entertaining for clients
- Mileage spent visiting clients or Uber/Lyft fares for work visits
- Work-related travel expenses like airfare, hotels, and even airport meals
You Want An Accountant
Unfortunately, filing taxes as a freelancer is substantially harder than as a full-time employee for someone else’s company. The combination of quarterly estimated taxes, deductions, and the extra paperwork freelancers deal with mean that it’s a smart idea to spend money on a qualified accountant. Remember: All the information on this page is for informational use only, and we strongly recommend having an accountant if you’re a freelancer filing taxes. Dig?
File Quarterly Estimated Taxes
I don’t known anyone who enjoys paying taxes every quarter. But because freelancers generally don’t have taxes automatically taken out of their paychecks (Again, unlike full-time employees), they have to deposit their estimated taxes every quarter. If you don’t, the IRS charges fines and penalties.
One of the biggest challenges for quarterly estimated taxes is that they’re based on how much money you made during the prior tax year. This can be great if you’re earning more than you did the year before, but substantially, err… crappier… if you’re earning less than the year before. Given how much freelancer incomes can vary year by year, this is one very good reason to keep an emergency fund.
Forms To Know
- 1099: Any client or contractor who has paid you more than $600 is generally required to give you a 1099 showing how much money they paid you.
- 1040: 1040s are the tax forms most Americans generally fill out on April 15.
- Schedule C: Schedule Cs are the forms which are used to file business taxes.
- Schedule C-EZ: This is a simpler form of the Schedule C which can be used by freelancers like personal trainers, writers, and illustrators who don’t sell physical inventory. If you have more than $5000 in business expenses, you’re required to fill out a conventional Schedule C.
- Schedule SE: The Schedule SE form is used to estimate taxes for each year.
Things To Avoid
Again, we strongly recommend a good accountant. Spending $200 or $300 on an accountant is so much easier than dealing with an audit, and worth every cent you spend. But as you prepare for your taxes, there are a few things which are crucially important to remember.
First off, you need to tell the IRS exactly how much you made. You can’t estimate how much you earned; you need to use the 1099 and W-2 information you received to give the IRS exact amounts.
You also have to remember that, for car deductions, you can only deduct mileage for business-related travel. Deducting everyday driving is a no-no. For all business travel you’re doing inside your car, keep track of the date, the starting time, and the ending time. Using an automated service such as MileIQ or Metromile can be invaluable if you travel frequently for work.
And if you live in a city or suburban area and use public transportation, Lyft, or Uber for work, keep tabs on your subway card purchases and ride receipts.
Lastly, if you’re deducting a home office, remember: It has to be a separate room dedicated to your business that’s inside your home. As much as we’d like for it to be the case, a MacBook on top of the kitchen table with a well-thumbed copy of a client proposal next to it sadly doesn’t count.