You’ve made it. No more reporting to the man. No more morning and evening commute. No more pointless meetings. And you’re in your pajamas. You’re a freelancer, which is amazing … right up until tax time. And it can still be great then, but you need to understand that you’ll be filing quite differently when you work this way—it’s best to arm yourself with as much knowledge as possible. You don’t have to change out of your slippers, but we do recommend you read on to find out more about how to file your taxes as a freelancer.
The first thing that we would recommend is that you secure a tax professional who works with freelancers and/or those who own small businesses; these individuals can provide invaluable advice regarding tax issues, and in worst case scenarios, offer IRS help. The prompts you get from your home tax programs could easily be misunderstood and result in a lot of errors. These mistakes could cost you money or present a huge problem in back taxes. Because the tax laws are so nuanced and you’re no longer getting automatic deductions taken out of each paycheck, it’s best to leave it to a professional with experience in this area.
As we mentioned earlier, it’s also crucial when freelancing to arm yourself with knowledge on what you’re going to owe. This way, you’re not blindsided by something you weren’t expecting. Because you no longer have an employer who is taking automatic deductions out of each paycheck for social security and Medicare taxes, you are responsible for your self-employment tax. The downside? You have to pay the share your employer was formerly paying. The upside? You can deduct this employer portion. Again, if you are prepared for these fees you will be fine.
As Florida-based CPA Shana Bickel notes via this Forbes.com article, if you don’t have an accountant yet, think about setting aside 30 percent. That’ll change if you live in a state with high taxes, if you’re unmarried, have no deductions, and have a high income. In these cases, Bickel recommends preparing for 40 percent.
Another thing to bear in mind is that the IRS likes their money on a regular basis, just as if you were working for the aforementioned man. Therefore, you should pay your taxes quarterly. Otherwise, you run the risk of paying a hefty fine. And without an accountant with this type of experience, estimating it on your own behalf is also likely to be a big mistake, as you will likely have the number you owe very wrong.
It should go without saying that you want to keep in mind your ability to write things off. An accountant will know which are legitimate write-offs and which are a stretch. The general rule of thumb is that you can deduct expenses deemed “ordinary and necessary” by the IRS. However, many of these write-offs are very specific to the field you work in so, if you are hiring a tax professional, you want to hire someone who has worked with/for someone in your field before. As the Forbes.com article mentions, many people mistakenly assume they can write off entire meals when entertaining clients, but the truth is only half can be deducted … that is unless you do something like writing restaurant reviews for a living.
Lastly, you’ll want a pretty extensive paper trail—whether it be literally paper or digital. The deductions we mentioned can’t be taken unless you have proof of what you purchased. This might seem like a pain at first but remember those pajamas you’re wearing—it’s worth it, right? Make regular logging of these a habit and it should be no problem. Scan your receipts so they don’t get damaged and keep track of each interaction in a spreadsheet. If you’re able to bring something like this to your meeting with your tax professional, the whole process should be a breeze.
Ahhh, the freelance life is fantastic. And if you follow these tips for filing as a freelancer before and at tax time, you’ll have basically realized the American dream.
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