Work from your desk, a coffee shop, or a beach towel in the Bahamas — the world is the freelancer’s office. But, just like everyone else, one thing freelancers can’t escape is taxes. Whether a freelancer has filed as a corporation or is just winging it as a sole proprietor, the freelancer is considered to be a business, and when filing as such, things can get a little bit complicated, especially for the first-time filer.
To avoid that sinking feeling like you’re always missing an important deadline, we really recommend using a good tax calendar as a guide, as well as the answers we’ve provided below to commonly asked freelancer tax questions.
When you worked for a larger company, you may not have appreciated just how much the payroll and accounting departments did for you. As a freelancer, you’ll have to track your own business income. You’ll have to do it well, too, as the IRS will be comparing your income next to reports from other similar professionals, and they’ll also receive income reports from your clients in the form of 1099s. From expenses to income, track everything you do with a bookkeeping or accounting program, and do it as you go, so that you always have accurate records on hand.
Adds Austin-based Certified Public Accountant, David Coffman, “Freelancers should really use a separate bank account through which all business activity should flow, rather than mixing business activity in with their personal account.” This will make accounting itself a much simpler task, and it will be less of a red flag for audits.
What are estimated taxes, and why should they matter to me?
When you work on your own, you’re responsible for withholding estimated taxes every quarter, just like your former employer was responsible for withholding them from your paychecks. This will include withholdings for income, social security and Medicare. On the 15th of every January, April, June and September, you’ll need to fill out IRS form 1040-ES and mail it along with your payment to the IRS, or submit it online through the Electronic Federal Tax Payment System.
Strictly speaking, you should plan on paying 15.3% of your income after expenses every quarter (which we recommend putting aside in a savings account as you go), but you should set aside more to account for income tax (talk to your accountant for help determining the exact amount). Failure to do so may result in penalties.
What forms will I need to get from my clients at tax time?
If you earned more than $600 from them, your clients will send you a 1099 listing how much they paid you. If you earn less than that, you’ll still need to report that income, even if you don’t get a form.
“This is one reason why good accounting records are so important,” agrees Coffman. Don’t rely on clients to get it right for you.
What forms will I need to file?
The exact types of forms you’ll file will depend on whether or not you’ve kept it simple as a sole proprietor or you’ve filed as an LLC or C-Corps (and you should file so that you can be sure to take advantage of the many tax benefits available to you). At the very minimum, as a sole proprietor you’ll file a 1040, a Schedule C, which will address taxes specific to your business, and a Schedule SE to calculate self-employment tax.
As a freelancer, what special deductions are available to me?
There are many deductions available to freelancers, but you’ll have to keep good track of all of your purchases and expenses with receipts and solid bookkeeping. A few include:
• Insurance — Business insurance is deductible, as is health insurance on form 1040 as an adjustment to income.
• Professional Services — Includes lawyer and consulting fees, including those of your accountant.
• Advertising — From TV spots to business cards and everything in between.
• Home Office — If you work from the home, a percentage of your rent and utilities may be deductible.
• Travel — If you’ve traveled for business and stayed overnight, the cost of your lodging and 50% of your meal expenses may be deductible.
• Office Supplies — Go ahead and replace that computer. Office supplies are deductible, as are repairs to them.
I’m really scared of getting audited. What most commonly triggers audits?
That said, there are some deductions that flag the IRS’ attention more than others. A few to be careful around:
• The Home Office Deduction — This is a very common trigger for audits, as many people really push the boundaries of their claims. Read the rules carefully in IRS Publication 587, and make sure whatever space you claim is really just that space, and that you use it exclusively for business purposes.
• Meals and Entertainment — Sure, that $3,000, Crystal-fueled meal may have been with a client you were trying to win, but pricy and overly frequent wining and dining expenses are sure to raise the IRS’ eyebrows. Keep it reasonable, and for the last time, keep your receipts!
• Mileage — If you use your car for business and play, keep good track of just when, how much, and for whom you’re racking up mileage. The IRS will know when you’ve got way more miles than is reasonable for your given career.
As a freelancer, you are a business unto your own. As such, it’s important to treat your taxes with the same seriousness as an employer. Do your research, get it right, pay an accountant to help you find more deductions and make sure you’re doing it all correctly, and you’ll find yourself a host of financial benefits.
This is a guest post by Alyssa Ennis. The content of this column intended for informational use only and is not to be construed as providing legal, investing, accounting, or other professional advice. Your situation is factually specific and you should accordingly seek qualified professional counsel concerning your specific legal, investing or accounting needs.