If you’re freelancing, hopefully you’re not working for free.
But whether you’re raking in the dough or just scraping by, you still have to pay Uncle Sam.
We’ve talked about taxes before here, here, and here. But, because of unusual work situations, record unemployment, and pandemic-related relief programs, the 2021 tax season might look a little different so we’re sharing a few resources to help you tackle your taxes.
Keep in mind I’m a freelance writer -- not an accountant or an IRS employee -- so take this as general advice but check with your financial advisor or tax professional.
Let’s get started...
Taking care of your tax obligations isn’t something most people think of as a fun activity.
In fact, just the word “taxes” is enough to make some people break out in hives.
Maybe they’re not sure how to deal with taxes as a freelancer or when taxes are due. Maybe the whole process is too complicated and they just need a little help.
Whatever the case may be, in preparation for the upcoming tax season (April) we want to help freelancers get ready.
First things first: If you want to estimate how much you'll owe in federal taxes on your 2020 return, use this free tax return calculator. You can also use this tax prep checklist to get organized and make sure you’re filing the correct forms.
Remember, taxes are the same for independent contractors and freelancers. Also, don’t forget about state and municipal taxes you may be responsible for.
I think we can all agree that 2020 was a… unique year.
Under normal circumstances it can be easy to get overwhelmed during tax season especially when freelancers get bombarded with 1099s every January.
This year it’s even more important to stay on top of your financial health as a freelancer.
And that means keeping up to speed with changes in the filing process.
For example, did you know that starting with the 2020 tax year, the form you’ll use to file federal taxes changed from 1099-MISC to 1099-NEC (non-employee compensation)?
Or that the deadline to send Form 1099-NEC to contractors was February 1?
Some of the filing dates differ this year as well.
Keeping track of what you need to do and when can prevent you from stressing over your tax situation.
Important tax deadlines and dates for freelancers
2020 has been an interesting year when it comes to taxes.
We’ve seen everything from extensions and exemptions to stimulus checks and loans. If you’re wondering how these things may affect your tax deadlines for the 2020 tax year, here are the most important dates at a glance.
JANUARY 15, 2021
4th-quarter 2020 estimated tax payment due. If you have fourth-quarter income that requires you to pay quarterly estimated taxes, your return should’ve been postmarked by January 15, 2021.
APRIL 15, 2021
The due date for filing your tax return and making tax payments is April 15. If you haven't applied for an extension make sure you, e-file or postmark your individual tax returns by midnight. Your Individual Tax Return Extension Form for Tax Year 2020 is also due on this day.
1st-quarter 2021 estimated tax payment due. If you're paying quarterly estimated taxes, make sure your Form 1040-ES is postmarked by this date.
Last day to make a 2020 IRA contribution. Still looking to fund your retirement account for 2020? The deadline for a contribution to a traditional IRA (deductible or not) and a Roth IRA is April 15, 2021. If you have a Keogh, SEP, or other eligible plan and get a filing extension to October 15, 2021, you have until then to add 2020 money to those accounts.
JUNE 15, 2021
2nd-quarter 2021 estimated tax payment due. For freelancers making payments on quarterly estimated taxes, have your payment postmarked by this date.
SEPTEMBER 15, 2021
3rd-quarter 2021 estimated tax payment due. For freelancers making payments on quarterly estimated taxes, your third-quarter payment should be postmarked by September 15, 2021.
OCTOBER 15, 2021
Extended individual tax returns due. If you filed an extension on your 2020 tax return, October 15, 2021 is the deadline for e-filing or postmarking your return.
JANUARY 15, 2022
4th-quarter 2021 estimated tax payment due. Your final estimated tax payment should be postmarked by January 17, 2022.
We’ve covered the key dates every freelancer should know. Here are some of the top questions freelancers have about taxes and my best answers.
Q: Do freelancers need to pay taxes?
A: According to best-selling author and nationally syndicated host of The Ramsey Show Dave Ramsey, “If you earn $400 or more from freelance work in any given year, you are responsible for paying taxes on those earnings.”
Q: What are the estimated tax due dates for 2021?
A: As mentioned above, estimated taxes are paid on a quarterly basis, with payment deadlines being April 15, June 15, Sept. 15, and Jan. 15 of the following year. If a due date lands on a weekend or legal holiday, payments are due on the next business day.
Q: Will the tax deadline be extended in 2021?
A: Yes… and no. According to The Motley Fool, “The IRS has confirmed this week that it will not, in fact, be pushing back the April 15 deadline this year.” However, Texas residents and business owners suffering from the February 2021 winter storm will now have until June 15, 2021, to file certain tax returns and make tax payments (including 2021 estimated tax payments) normally due prior to June 15, 2021 according to Husch Blackwell LLP.
Q: What is the self employment tax rate for 2021?
A: The self-employment tax rate is 15.3% -- that’s 12.4% for Social Security and 2.9% for Medicare. The IRS says, “Self-employment tax is a tax consisting of Social Security and Medicare taxes primarily for individuals who work for themselves. You figure self-employment tax (SE tax) yourself using Schedule SE (Form 1040 or 1040-SR).”
Q: How often do freelancers pay taxes?
A: Most freelancers pay four times each year and calculate quarterly estimated payments. As mentioned above, the first payment of 2021 is on April 15, which is also the filing date for your 2020 taxes.
Q: Do I have to pay taxes on unemployment benefits?
A: Generally, the IRS considers unemployment compensation income, and taxes it accordingly. Of course, you can choose to have federal income tax withheld from your unemployment compensation benefits if you want to avoid surprises at tax time.
Q: Are stimulus payments taxed?
A: If you received stimulus checks, a.k.a. economic impact payments, you don't have to pay income tax on that money.
Q: How does working remotely affect state income tax?
A: OK, so remember when I said I’m not a tax expert. This is one of those questions I’m not even going to attempt to answer because the laws around it are convoluted. The bottom line is each state has its own state tax laws relating to working remotely and depending on your state of residence and location of your employer TK.
According to a poll conducted by the American Institute of CPAs, 7 out of 10 people didn’t know working remotely in other states can affect the total amount of state taxes they owe and a little more than half didn’t know the number of days worked out of the state where their physical workplace is located can also impact the amount of state taxes owed. 41 states that have a state income tax and more than 20 of those states have a one-day rule for owing state income taxes if you travel there to work or work there remotely.
Q: What deductions can self-employed workers claim?
Q: What about other possible tax credits?
A: Again, this is depends on your particular situation but check out 53 tax deductions & tax credits you can take in 2021 from personal finance expert Derek Silva and Kiplinger’s Most-Overlooked Tax Breaks and Deductions for the Self-Employed.
Q: What if I miss a tax deadline?
A: You should file an extension requesting additional time to comply. According to TurboTax, “Late-filing penalties can mount up at a rate of 5% of the amount due with your return for each month that you're late. If you're more than 60 days late, the minimum penalty is $100 or 100% of the tax due with the return, whichever is less. Filing for the extension wipes out the penalty.”
Q: What if I owe more than I can pay?
A: The IRS says you should, “file your return by the deadline and pay as much as you can to avoid penalties and interest. You also should contact the IRS to discuss your payment options at 800-829-1040.”
Q: What's the fastest way to file my tax return?
A: The fastest way to file your tax return is to file electronically, especially this year with everything that’s going on.
Q: What is the 110 rule for estimated taxes?
A: It’s more a rule of thumb than an actual rule. The 110 rule is a method you can use to avoid an underpayment penalty by paying either 90% of this year's income tax liability or 110% of last year's income tax liability.
Not only is Hectic is where freelancers go to get started.
It’s also the all-in-one platform created to help freelancers launch the business of their dreams.
That means when it’s time to do your taxes you won’t have to search through sent, follow up, or still outstanding emails and random notes. You can easily see all your invoices and contracts in one location.
And at the end of the year you can export all the necessary financial details from your year for tax purposes in one click.
Plus, the project management tool will help you keep track of who needs to send you a 1099-NEC (and any contractors you may need to send a 1099-NEC to!).
From business development to client management to helping freelancers get paid on time and get back to what it is that they do best. Join the Hectic community now, and together we can change the future of work.
Visit Hecticapp.com now to see what we’re all about, and remember your first client on the platform is always free.
I highly recommend this platform if you're a freelancer seeking a client/project management system that allows you to focus on nothing else but the quality of your work.