It's no secret that working as a freelancer comes with a large variety of benefits that you can take advantage of. Interestingly, though, things can get a bit complicated when it comes to filing your taxes each year.
Fortunately, it's not as difficult as it may first seem to navigate through your tax obligations.
Not sure where to start? Don't worry, we’ve got you covered.
Let's take a look at everything you need to know about freelancer taxes.
Under normal circumstances, your employer will pay a portion of your taxes for you each year. This amount is associated with Medicare and Social Security funding.
As someone who is self-employed, though, you'll be responsible for this amount each year. This means you'll need to set aside extra cash to pay the IRS with.
You can facilitate doing so, though, if you strive to...
One of the most important aspects of filing your taxes as a freelancer is that you're solely responsible for reporting the income that you make within a given year.
To help facilitate this, it's imperative that you track your income as accurately as possible. This means setting up a bank account that's used solely for business-related payments.
Additionally, you should also maintain records of any purchases you make that are business-related (this will come into play later).
Writing memos for business-related checks is also a good idea. It will allow you to quickly discern whether it was a business payment or personal payment.
This isn't required for freelancers to do, but it can make filing taxes much easier.
By establishing an EIN, though, you'll be able to yourself as a business entity and easily facilitate the separation of personal and business activities. You'll use this number both when filing taxes and creating a business account to keep track of your funds.
To get started setting up an EIN, you can apply at the official IRS websites. The process often only takes a few minutes to complete.
For people who have only ever handled W-2 forms, this will come as a significant change to the way you file your taxes.
Clients who pay you for your work issue you this form so that they can prove to the IRS how much they've spent compensating workers throughout the tax year.
Interestingly, though, you'll notice that no money was set aside for handling taxes before paying you. You'll need to report the gross amount that you earned during the year, as it will influence how much money you owe the IRS.
Just like companies send 1099 forms to their freelancer workers, you may need to send this form to anyone you hire throughout the year.
If you've paid someone at least $600 in work-related compensation within a 12-month period, you're responsible for reporting it to the IRS. That individual will then use a 1099 form to report their income and handle their own tax obligations.
If you need to go this route, you can also expect to receive a W-9 form from your worker. All you'll need to do is provide basic information about your identity as an employer.
Then, both forms are sent to the IRS.
Although you'll have extra tax obligations as a freelance worker, you can also educate a larger number of expenses for your gross income.
Your tax rate will be the same, but you'll be taxed on a lesser amount after your deductions. This will directly result in you paying less money in taxes.
In general, you'll be able to deduct expenses like:
As previously mentioned, keeping track of every business-related expense will allow you to seamlessly discern what type of deductions you can make on your gross income. Take advantage of every opportunity to save money through those deductions.
This is further facilitated by having a dedicated credit card that's used for your business. You can simply download your annual statement and deduct all of your expenses since they'll all be business-related.
Although it can seem intimidating to handle this increased tax responsibility by yourself, it's not as hard as you might think at first to file on your own.
While there's something to be said about hiring a professional to help you, filing by yourself can help you better understand the intricacies of the US tax system.
Bonus: As your career progresses, you'll already have a foundation of tax knowledge if you choose to start a legitimate company in the future.
If you do decide to hire someone, though, make sure that it's someone you're comfortable communicating with. That way, they can get the best idea possible of your income/associated business expenses.
This will help you save more money in the long run as opposed to working with someone who rushes through the process.
But it doesn't have to be.
With the above information about freelancer taxes in mind, you'll be well on your way toward ensuring that you handle everything appropriately.
Want to learn more about how Hectic can help you run your freelance business?