With the job losses and unemployment numbers this year, freelance work has replaced full-time staff positions for many people. This means that, with the gig economy already in full swing, we can expect to continue to see a robust freelance economy in the future. Since this is new territory for many, there are some new tax things to know. If you’re new to freelancing—which in the tax world is defined as earning more than $400 from a single client—doing your taxes won’t look the same this year. Here are tips on how to stay on top of your tax game:
Baby Steps
The first thing to do is to gather all of your sources of income. Unless you work for one really, really high-paying client, chances are you have money coming in from a number of clients. As a freelancer, you need to be really organized. You’ll need to keep track of all your 1099 forms, receipts, and expenses. Come up with a system that works for you. Maybe it’s Excel or use an app like Keeper Tax, which will help you with tax write-offs. Remember that freelancing isn’t a hobby—you own your own business. Approach your bookkeeping as you would at any other company. If you need to hire a third party and have the financial means to do so, then do it.
Pay What?
Sometimes it can be confusing to know what, exactly, you are paying taxes on as a freelancer. Because you own your own business, you’ll have to pay a 15.3% self-employment tax, which goes towards social security and Medicare. You’ll need a social security number or a tax identification number to file. Also, as a sole business owner, you might be paying your taxes quarterly, instead of yearly. Refer to the IRS webpage on estimated taxes to know if this applies to you. On top of this, your state might have its own self-employment tax. So make sure you do your research early.
Keep Track
The good news is that you can still write-off some expenses as a freelancer. According to the IRS, freelance expenses must be ordinary and necessary. So, things that fall into that category would include lodging, food, mileage, any office supplies or related equipment. Again, think of this as you would any other business or corporation. You can expense business trips and any materials needed to do the work. This is a really important piece of tax filing, especially because the majority of freelancers don’t take advantage of it. Other areas you can deduct as a freelancer: health insurance premiums, marketing, membership dues, business insurance, home office, and contract work (say, if you hired someone to build your website). Don’t overlook these things!
Get Help
Many experts suggest first-time and new freelancers hire an accountant. Taxes are complicated and you don’t want to miss anything. If you’re in the freelance game for the long-haul, you can start to work on your taxes on your own if you feel comfortable down the road. But it’s a good idea, especially starting out, to get help. If you want to support the very gig economy you’re working, you can even hire a freelance accountant on Upwork, or other similar sites such as Freelancer.com. Hiring an accountant doesn’t have to be a big, expensive undertaking.
Change Your Mindset
As a freelancer, you likely won’t see a tax refund because you probably haven’t overpaid the government. Remember that you’re sending in quarterly taxes, which is essentially paying-as-you-go, so this scenario is unlikely to happen. You need to get in the mindset of factoring in your taxes to your financials. It’s a good idea to set aside about 25-30% of your income, which should cover your taxes unless you don’t pay them on time and receive a penalty. It’s better to set aside the money quarterly, than just a big chunk every year. This is because of the quarterly tax and as freelancers, your income might not be stable. You might receive $7,000 one quarter and $3,000 the next.
Freelancers are often chasing after the right forms from clients. The tax process for freelancers can be messy, but it doesn’t have to be. As long as you’re organized and prepared on the front end, there’s little reason why paying taxes as a freelancer needs to be complicated. There are resources out there, too, so if you get stuck, think about hiring a freelancer to help.