If you’re one of the 57 million people – or 35% of the U.S. workforce who freelances, you enjoy a lot of freedom. You get perks like:
And of course, there’s the not so fun parts of freelancing… like paying taxes.
Today I want to share a few tips and strategies that you can use to prepare to file taxes without getting stressed out.
But before I jump into the details, let's set something straight...
The ability to brand yourself is one of the upsides to freelancing.
Maybe you refer to yourself as a designer, photographer, or writer.
Or maybe you have a creative title like “marketing ninja” (I really hope not. People who call themselves ninjas when they don’t know ninjutsu or have an actual sword really grind my gears but anyway…).
From a tax perspective, the Internal Revenue Service (IRS) doesn’t care what you call yourself -- freelancer, self-employed, independent contractor -- because in their eyes, you’re still a business (self-employment is a tax status, freelance is the way you perform your work).
And that means you’re responsible for the Social Security and Medicare taxes your employer used to handle… the full 15.3% tax.
It’s like Michael Bloomberg said, “Taxes are not good things, but if you want services, somebody's got to pay for them so they're a necessary evil.”
As freelancers, we can’t depend on an employer to make deductions from our income on our behalf. Self-employed people are responsible for staying on top of their own tax obligations and figuring out what they owe and when they need to pay.
Plus, when you freelance, tax time isn't once a year – it's always on the horizon (more on this in a bit).
Our tax obligations as freelancers are more complicated than those of wage-earning employees.
If thinking about taxes makes you want to break out in hives, you’re not alone.
Many new freelancers don’t consider taxes (until it’s too late) and most new freelancers undercharge.
If you make either of those mistakes, you will end up paying for them later.
And, of course, that’s only the tip of the iceberg.
If you don’t file your tax returns, the IRS may prepare your return for you. That’s what’s known as a substitute for return. The problem is the IRS will not have your best interest at heart when they prepare the return. For instance, if you’re eligible to deduct business expenses, the IRS will not claim those deductions for you on your substitute return.
The IRS has a whole department called the IRS Small Business/Self-Employed department. This department has the power to enforce return filing, levy your income or assets, or even file a tax lien on your property. And — the IRS can keep taking your earnings until you file your back tax returns and pay the taxes you owe!
If you owe more than $50,000 in back taxes, penalties, and interest, the IRS can get the State Department to revoke your passport.
Finally, if you don’t file returns and pay self-employment tax, your earnings for those years won’t count towards your future Social Security benefits which affects your future income.
I'm not an accountant (I don’t even play one on TV) so take my advice with a grain of salt.
Better yet, consult a qualified professional.
That said, to give you a broader perspective on how working freelancers handle taxes, I reached out to some of my freelance friends to see what they had to say about doing taxes as a freelancer.
Before I share their insights, let me give you my two cents.
Here’s the reason I say leave tax prep to the professionals: Sure, I could do my own taxes. I can also change my own oil, do my own landscaping, and sew my own clothes. But I don't because there are people who are much better at it than I am. Same with taxes. I feel less stressed when I know a professional filled out all the proper forms correctly and made sure I claimed the right deductions and paid the right amount.
One of the biggest mistakes I see freelancers make is thinking the IRS is your enemy. We've all heard anecdotes about the big bad taxman. The reality is the IRS is just doing their job and can actually be helpful if you play your cards right. After all, what better source for answering any of your tax questions? They even have a free helpline (800-829-1040).
Now, let’s hear from some experienced freelancers about how to make this whole “tax thing” a little less painless.
Kat Boogaard is a Wisconsin-based freelance writer, mainly covering topics related to careers, self-development, and freelancing.
Jacob McMillen is a copywriter, content strategist, and founder of the Write Minds community
Megan Williams is a content strategy consultant who also runs Black Freelance, an online community for Black Freelancers.
Samar Owais is an email strategist & conversion copywriter for SaaS and eCommerce businesses.
As someone who started her business in a tax-free country (UAE), I spent 10 years not worrying about taxes. Then I moved to a country where I had to pay taxes for the first time in my life. So here's my advice from deep in "tax newbie" trenches.
The good news is you don’t have to suffer through tax hell.
There is a lot of advice available if it’s your first time filing taxes as a freelancer.
And there are plenty of tools to help you stay on top of your financial situation… like Hectic.
Not only does Hectic help you keep track of expenses, invoices, and payments, but Hectic also gives you access to trusted expert advisors so, if you need a tax guy or gal, we’ve got you covered.
Freelancers can become unstoppable with a single place to manage their entire freelance business and have the ability to tap into experts and a community of their peers. Join the Hectic community now, and together we can change the future of work.
2021 is the year of the freelancer, and we’re here to make it happen!
Hectic is an all-in-one business management platform created specifically for freelancers who are just getting started or looking to grow their business.
Visit Hecticapp.com now to see what we’re all about.