As if the tax system wasn’t complicated enough, nothing strikes more fear into the heart of the freelancer – end of the year tax time!
Freelancing individuals are responsible for their own payroll tax as well as an additional self-employment tax, which is a social security and Medicare tax primarily for the self-employed.
Almost all freelancers are responsible for this self-employment tax if:
- Their net earnings are greater than $400
- They are a church employee with an earning of greater than $108.28
In 2017, the self-employment tax rate is 15.3%.
Before we discuss further, know these terms to make your life easier:
Asset – something of monetary value used for your business.
EIN – your employee identification number. This pertains to you if you operate a partnership.
Expense – any cost directly related to and necessary for your business. If you are a startup, you can deduct all the start-up costs!
Gross Receipts – this is the total monetary income received before expenses are subtracted.
Net Loss & Net Profit – if your expenses are more than your gross receipts, you have a net loss and vice versa.
Schedule C – Report all your profits and losses on this form.
Quarterly taxes are the method used to pay tax on income not subject to withholding. You can opt to pay taxes monthly or at the end of the year, but be prepared to incur fines and a possible audit! When freelancers pay quarterly, the dates are:
- April 15th
- June 15th
- Sept 15th
- Jan 15th (after the end of your tax year)
If you expect to owe less than $1000 in taxes after subtracting your federal income tax withholding from the total tax you owe, you may be exempt from paying quarterly taxes. You may also be exempt if your withholding amounts to 90% of the tax you owe for that year.
When filing quarterly taxes, you will need the 1040-ES form. You can use this quick equation to estimate how much your quarterly tax payment will be: subtract the withholding from your total tax and then divide that number by 4 for each quarter. You may adjust this number based on your prediction of whether your income may increase or decrease.
As a tip, it’s recommended you pay your estimated taxes monthly – it is less daunting, more manageable. Also, enroll with EFTPS (Electronic Federal Tax Payment System) to pay. Lastly, do not forget to include your self-employment tax in your estimate.
Annual taxes are due April 18th. You will need the 1040 Schedule C, 1040 Schedule C-EZ, and 1040 Schedule A. It’s recommended that in this case, you seek the advice of a great accountant who is knowledgeable with freelancer deductions. It is critical that you are organized and keep accurate records to get the most out of your deductions and to protect you during audit-time!
Know your deductions. Here are just a few of the lesser known ones you’re allowed to take:
Unpaid Invoices – any client who didn’t pay their bill can be written off as bad debt. You can use the accrual method of accounting for this.
Coffee Meetings – any business related meeting over coffee
Paypal Fees – any credit card transaction fees related to the business
Home Expenses – if you work from home, then payments toward utilities, mortgage interest, insurance, electricity, and internet
Research – conferences, buying books and materials related to your industry count!
Job Hunting – any cost for project bidding or expenses for new clients
Hiring Another Freelancer – subcontracting work to another freelancer
Cell Phone – any secondary phone number
Professional Advice – fees for advice from an accountant, lawyer, and other professionals
Healthcare – medical and health insurance expenses
Self-Employment Tax – you can deduct half of your self-employment tax on your income tax!
Credit Card Interest – if it was an expensive item charged, the interest is deductible