The small business economy is on an upswing as consumer spending increases to nearly 60,000 per person per year.
If you’re one of the millions who has taken your passion and/or talents and has turned it into a freelancing hustle, we have two things to tell you…
First, congratulations. It takes a special quality most people don’t possess to build a profitable business.
Second, brace yourself. If this is your first year freelancing, you’re going to run into some hurt come tax season.
Freelance taxes have been jeered by many as unnecessarily complicated. When you work for somebody else, taxes get done on autopilot. When you work for yourself you’ll have to stay mindful of a few more things.
To get the most out of filing taxes this year as a freelancer, keep reading. Below we’ve put together a simple freelancer tax filing guide.
Understanding Self Employment Tax
As a freelancer, you may be prepared to manage your state and federal income tax obligations like you would with any regular job. Unfortunately, as a freelancer, you have an added tax obligation.
That obligation is called self-employment tax
Self-employment taxes are funds that go towards Social Security and Medicare. When you’re employed by someone else, half of this tax is automatically deducted from your paycheck and the other half comes out of your employer’s pocket.
Since you’re self-employed, you’ll have to manage both halves of this tax to the tune of 15.3%. You’re on the hook to pay self-employment tax if you make over $400.00 freelancing during a tax year so be sure to set aside an appropriate amount of your earnings to cover this expense.
United States taxes are a pay as you go system. If you work for a 3rd party, you’ll notice this when taxes are taken out of your paycheck every week.
If you’re self-employed though and nobody is around to take taxes out of your checks, managing this task will be up to you.
Consequently, instead of filing your taxes once a year in April, you’ll likely need to file 4 times a year on the following dates:
- April 15th
- June 16th
- September 15th
- January 15th (of the following year)
On the above due dates, you’ll send in however much money you estimate you will owe in taxes based on how much money you’re on track to make during that year.
For example, if you project that you’ll make $50,000 this year and after going through all of your tax obligations think you’ll owe $15,000 in taxes, you’ll want to split that amount into 4 parts and send in an equal chunk on each due date.
If your annual projection grows or shrinks between due dates, you can reduce or increase your subsequent payments accordingly.
Keeping Tabs on Your Income and Expenses
In order to have a precise understanding of how much you’re going to need to send in when filing taxes, you’ll first need to wrap your head around how much money you’re making with your business and how much you’re losing.
To do this, you’ll want to keep precise records of incoming and outgoing expenses. The most basic way of doing this would be by leveraging an excel sheet. A more sophisticated and reliable way would be to use any one of the number of the financial tracking applications available online (a few of which we will suggest in a moment).
Another important reason to keep track of your expenses, in particular, is that your expenses can get deducted from your taxable income.
For example, if you are a graphic designer who made $700.00 this year but spent $300.00 buying the computer you needed to complete your graphic design work, you technically only made $400.00 in taxable income.
As you can see, when you add in other non-taxable expenses such as business lunches, travel, tools, home office expenses and more, the income you will be taxed on can shrink substantially.
The more legal deductions you claim, the less you’ll spend on taxes. So track your expenses diligently to maximize your tax return!
Helpful Tools and Resources
If you’re still feeling overwhelmed when it comes to filing taxes, know that you’re not alone. Managing freelancer taxes for the first time can be extremely stressful.
Fortunately, there are tools that can help.
For extensive information on filing as a self-employed individual, there is no substitute for working with a qualified accountant. You can search for one in your area by checking your state’s CPA database.
Wrapping Up Your Guide to Filing Taxes as a Freelancer
Filing taxes when you’re a freelancer can represent one of the biggest learning curves you’ll need to deal with when starting your own business.
The sooner you wrap your head around things like self-employment tax, estimated taxes and find the right online tools to help you manage your finances, the sooner you’ll be able to master your taxes and start focusing your time on the things you do best!
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