Freelancer Friday: How To Deal With Taxes As A First-Time Freelancer

There are lots of things to love about freelancing but navigating the tax system definitely isn’t one of them. For newbie freelancers in the United States, the whole tax thing can be pretty daunting at first; anything that includes tons of paperwork (and math!) usually is. It’s the price you pay (literally) for all of the flexibility and freedom that comes with running your own business.

However, once you get up to speed on how to do your taxes, it’ll simply become a part of your routine rather than a huge anxiety inducing event. And if it still drives you crazy after you actually know what to do, then that’s what accountants are for!

Here are some of the things you need to know about tax as a first time freelancer;

Your Filing Status

‘Freelancer’ isn’t really a recognized term when it comes to tax code, so you’re better opting for ‘self-employed’ or ‘independent contractor’. You can select either or both terms, depending on which best reflects what you do.

A self-employed person is someone who does their own taxes and isn’t hired by an employer. In comparison, an independent contractor is a self-employed person/business entity who works for another person or business entity with a verbal or written contract in place.

For example, if you design t-shirts and sell them on your own website then you’re self-employed. But if you’ve been hired to design t-shirts for another business, then you’re an independent contractor.

Get Admin Savvy

Once you start your career as a freelancer, you need to set up a business account and start keeping track of everything, i.e. ‘keep the receipt’ isn’t even going to be in your vocabulary anymore.

When it comes to monitoring your finances, you can either DIY it and set up a basic excel spreadsheet, or push the boat out and sign up with an accountancy system like Quickbooks. If you’re only working with a few clients, you should be fine with the excel sheet scenario — but as your business grows, you’ll likely have to look at more comprehensive options (or your brain might explode — true story).

Registering Your Business

As a self-employed person or an independent contractor, you don’t have to register your business with the IRS. Instead, you can just use your Social Security Number and self-classify. However, it’s advisable to get set up with an Employer Identification Number (EIN); this is assigned by the IRS and it classifies you as a business entity. You can get one on the IRS site and it’s very straight-forward process.

Ditching The W-2 For The 1099

Aside from sounding like a top hit of the 90s (or a highway), ditching the W-2 for a 1099 form is the main thing you need to be clued up on. When you’re an employee, you receive a W-2 form from your employer minus any deductions such as state income taxes, federal income taxes, Social Security and Medicare. However, as a freelancer, you’re issued a 1099 from your clients/businesses you’ve worked for, which simply states what they’ve paid you that year.

Then, it’s your job to report those amounts on your tax return and deal with your tax obligations. If you’re earning more than $400 a year, then you’ll also have to pay self-employment tax of 15.3% on the first $118,500 of your income and this is made up of two parts: 12.4% for Social Security and 2.4% for Medicare.

The Schedule SE form is used to report your self-employed tax and it’s then attached to your Schedule C — which is where you list your profits and losses, receipts, and business deductions. Whilst the tax rate will look pretty high to start with — don’t panic — there are deductions available to you as a freelancer that can help to make it more manageable!

Note: If your annual income is over $1000, you’ll also be expected to file estimated partial tax payments on this income throughout the year. The frequency of these is dependent on your estimated end of year income.

The Good News: Tax Deductions

One of the perks of being a freelancer is that you can avail of tax deductions (yay!), but it’s important that you don’t go crazy by trying to expense all of the things. For example, your Friday night pizza delivery isn’t a business expense — even if do you eat it at your desk.

So what can you deduct? It depends on your business set-up, but here’s a basic list;

  • Phone and Internet Services
  • Office rent space
  • Office equipment
  • Laptop + supplies
  • Travel (where applicable)
  • Advertising
  • Education Costs: training courses or programs that are relevant to your current business
  • Accountancy Fees (if you hire someone to do this stuff for you)

If you’re a freelancer working from home, you can also avail of the home office deduction. To qualify for this deduction, the IRS guidelines state that your home office space must be used in the following way;

  • Exclusively and regularly as your principal place of business for your trade or business;
  • Exclusively and regularly as a place where you meet and deal with your patients, clients, or customers in the normal course of your trade or business.

Not Your Idea Of Fun? Time To Hire An Accountant

If this all sounds like a massive headache to you, then it might be worth getting a professional on board. Hiring an accountant to look after your finances can actually be pretty cost effective. For example, you can do some of the work yourself — such as maintaining your business records — and just assign the heavy work to your accountant.

A good accountant will save you money in the long-run, not to mention the time you’ll save when it comes to figuring all of this stuff out yourself too!

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