While there are many perks to working as a freelancer, things can get a bit complicated when it comes time to pay taxes. Freelancers are considered by the IRS to be self-employed, which means that you must file as a business owner if you are a freelancer or independent contractor. Of course, there are deductions available, but there are also self-employment taxes to consider. Today, DGC Tax Prep offers some practical tips and resources to help you navigate taxes as a freelancer.
First of all, you need to get into the habit of tracking your income and expenses.
- Gather all your sources of income into one place, including 1099 forms from all of your clients, and report them to the IRS.
- Look for free tools that can help you keep your income organized, such as Google Drive, Google Sheets, and PayPal.
- Consider investing in paid tools to track your expenses and create a budget as well!
- And if you want to focus your time and energy on growing your business, consider hiring virtual assistant services to handle these details for you.
As a freelancer, you are eligible for certain deductions. Learn about these deductions so that you can determine which ones will benefit your unique situation.
- If you work from home, you can write off various expenses on your taxes that involve the portion of your home used for business. To be considered a legal business entity in the eyes of the IRS, you’ll need to be operating as an appropriate structure, whether that be sole proprietorship, partnership, or limited liability company. An LLC is a popular option because of the legal protections and tax benefits. The specific regulations depend on your location but an online formation service can help you file an LLC in New York in minutes.
- If you travel to meet clients, you can deduct 50% of fuel and meal costs. Keep a record of your mileage and receipts for tolls, gas and parking.
- PocketSense notes that many classes, training programs, licensing, and registration costs can be deducted from your taxes.
- You can also write off your computer, printer, and any other equipment that your job requires you to purchase and not reimburse you. Make sure to keep receipts.
Perhaps the most complicated part of paying taxes as a freelancer is the self-employment tax. Here are a few things to keep in mind:
- Freelancers must pay a self-employment tax of 15.3% in addition to income tax, according to SmartAsset.
- Traditional employees have a similar rate automatically taken from their paychecks that is used to cover Social Security and Medicare. The difference is that, rather than being responsible for the whole 15.3%, employers typically pay for half.
- You can estimate your self-employment tax by multiplying your net income (gross income minus business expenses) by 92.35%. Then, multiply that number by the 15.3% tax rate.
- You may be subject to late penalties and fees if you wait until the annual deadline to pay your self-employment taxes. Consult your accountant about paying Quarterly or Monthly.
Few career paths offer the flexibility and freedom of freelancing, but you will need to put a little more time and effort into planning your taxes each year. Consider the information and tips above to get off to a strong start!
Need help with planning, prepping, and filing your taxes? Let the certified tax professionals at DGC Tax Prep offer their insight. We have been serving our community since 1993 and would be delighted to assist you! Contact us today for a free quote.