November 27, 2019
What could be worse than going to the dentist? Filing taxes! It's confusing and annoying. And if you're someone who has a full-time job and a freelance gig, you may have no idea what you're doing or that some tax rules are different.
When you're self-employed, you are your own boss - which is fantastic news... until tax time. In addition to regular income tax, freelancers are responsible for paying a self-employment tax of 15.3% (it corresponds to Social Security and Medicare taxes). This covers both the employer and employee portions; as a freelancer, you are considered both.
Anything can be a side gig: a hobby, a seasonal endeavor, or occasional work that takes up a small amount of your time. For tax purposes, the IRS considers this type of work "other income."
As a full-time employee, you are probably familiar with a W2 Form. You typically receive it by January 31, every year. This document lists your annual income, the taxes you paid, insurance, and any monies deferred towards retirement.
As a freelancer, however, you would receive a form called 1099-MISC, also known simply as 1099. This is the most critical tax document for freelancers. Any client who pays you $600 or more in a calendar year must send you this form indicating your income by January 31. You typically don't have to attach your 1099 forms when you file, but it's a good idea to save them for future reference in case the IRS asks any questions.
When it's tax time, you have to file both W2 and 1099-MISC forms. You have to remember, though, that you still need to report income received from clients that paid you less than $600. The IRS deems this taxable income. You won't receive a 1099 form from these clients, so make sure you're tracking all income throughout the year.
To reduce tax liability and avoid penalties, you can pay your freelancer taxes quarterly. Use Form 1040-ES to calculate and pay your estimated taxes throughout the year. It's a good idea for freelancers to pay their estimated taxes throughout the year.
It's essential to keep track of your freelancing income and expenses, so you know how much money you made (or lost) freelancing. If you use bookkeeping software to track your financials, then doing taxes should be pretty straightforward.
Receipts are super helpful when it comes to tracking your freelance expenses. Freelancers should save receipts in case of an audit or if the IRS needs to verify any expenses. Using a receipt tracking app can help make this process easier.
Business expenses reduce the amount of taxable income, consequently lowering your tax bill. You can deduct certain expenses from self-employment income. Some costs that can be fully or partially deducted from your income include marketing costs, office supplies, business meals, software, and subscriptions, etc.
If you use your car for business, you can deduct car expenses or mileage. We suggest using a mileage tracker app to record your business and personal mileage throughout the year. Check out the IRS table of mileage rates for help calculating your mileage deduction.
If you have a home office, you can also deduct a portion of your living expenses, including mortgage (or rent), utilities, phone, home/renters' insurance, etc. To qualify for this deduction, you must regularly use a part of your home exclusively for doing business and your home must be your primary business location. The IRS also offers a simplified option using the square footage of your home office. Make sure to track home expenses that benefit your freelance work.