Freelancing grants you the type of freedom that's hard to come by with traditional employment. It enables you to set your own hours, charge your own rates, and take vacations whenever you choose. However, this freedom doesn't extend to tax season, and freelancers should approach paying taxes cautiously to avoid making costly mistakes.
If you're a freelancer, educate yourself about the implications of filing taxes as a self-employed person.
Tax Forms Unique to Freelancers
Freelancers use tax forms that are a little different than the ones traditionally-employed people use. A 1099-MISC form functions as a hub for all your freelance income. You should receive one from any client who paid you more than $600 during the year.
The Schedule SE is the form you must use to file self-employment taxes. In a traditional job, your employer deducts Social Security and Medicare taxes from every paycheck, but to cover those expenses as a freelancer, you have to use the Schedule SE. The 1040-ES is the form you'll use to pay your estimated taxes each quarter. It's a short form that's relatively simple to fill out.
Deductions Available to Freelancers
Once you've accounted for your income, go over your expenses and see if you can claim any deductions to reduce your tax bill. Common freelance deductions include:
- Home office
- Office supplies
- Travel expenses
- Professional development
Keep in mind that you need to keep receipts of every expense you claim as a deduction. This is necessary to prove that the expense was a part of doing business. It's also important to note that you shouldn't mix your freelance business with your everyday life as far as deductions are concerned. For example, your home office can't double as a guest bedroom.
Freelancers should send in estimated quarterly taxes to the IRS every three months. Filing estimated quarterly taxes is the equivalent of your employer withholding taxes from each of your paychecks.
Quarterly taxes are due in January, April, June, and September every year, and the IRS can apply stiff penalties if you don't pay them on time.
Professional Help Is Available
Freelance taxes can get complicated, so consider getting specialized help. An experienced tax professional has filed hundreds of tax forms and is familiar with tax rules and opportunities that you might not know about. Hiring an expert can help you avoid costly mistakes, especially if you're new to freelancing or run a complicated business with a variety of expenses and income sources.
Since the IRS considers freelancers to be self-employed, they must file taxes as business owners. It's important for freelancers to budget for those taxes throughout the year to avoid expensive late fees and penalties.
While filing taxes as a self-employed person is often complicated, it usually becomes less difficult with time and experience. However, if you need help, don't hesitate to ask for it. Seeking assistance alleviates a lot of the stress that is inherent in running a small business.