When you become a freelancer, your relationship with Uncle Sam changes. And while it may not be April 15th yet, now is the time to learn about those changes, because you may find you’ve got some extra work to do.
While I’m not a CPA, I do have one, and these are the essential tips he gave me when I came to him asking how on Earth taxes worked for me now that I’m working for myself. As with any tax advice, it’s wise to consult a professional if you have specific questions about your situation, but this should serve as a good primer on what you can expect. (Note: These tips apply to sole proprietors; if you have employees, see here.)
What to Report
At the end of the calendar year, every client who paid you more than $600 should provide you with a 1099-MISC form outlining how much they paid you that year. Make sure your records match theirs, because the IRS will wonder if there’s a discrepancy. If your clients don’t provide you with a 1009-MISC, that doesn’t mean you’re off the hook—it just means you’ve gotta do a little more legwork. Contact them to double-check that your numbers match, and be sure to report it yourself. You don’t want to play the “will the IRS notice” game, because the IRS usually wins.
If you’re just starting out or you only freelanced as a side job, you may not need to report your income—as long as you don’t expect to owe at least $1,000 in taxes for the year. To give you an idea where you fall, my CPA’s rule of thumb is to put aside 1/3 of every dollar I make for taxes. (I do this in a separate savings account.) So, if you made roughly $3,000 or more for the year, get ready to pay up. (Also prepare to pay if you made more than $600 from any one client, as these are the clients who will be required to report you on their own taxes.)
When to Report
If you’re a freelancer, tax time now comes four times a year for you. (Congratulations!) You will now owe estimated quarterly payments on January 15th, April 15th, June 15th and September 15th.
I say “estimated” because your payments are based on how much you expect to earn for the year. If you have a very good (or very bad) quarter, you can always recalculate your payments to make up the difference. This page has everything you need to know about calculating estimated taxes, or if you’re like me and don’t trust your math (or just hate doing it), you can consult a CPA. (Their fees can be written off as a “professional expense,” so that helps.)
What You Can Deduct
Freelance taxes can feel like a bloodletting, especially if you previously had a traditional job and you’re used to taxes being taken out of your paycheck without your having to think about it. (Putting aside 1/3 of each payment I receive from a client into my “tax savings account” is a perpetual reminder that Big Brother expects his dues.) But at least there are a number of things you can deduct.
This is where good recordkeeping comes into play. In addition to keeping track of your income, you also want to track any expenses you incur as a result of, or in connection with, your business. These include:
- Hosting or domain fees for your freelancing website.
- Continued education like webinars, courses, and other training.
- Office supplies and equipment.
- Business-related expenses like coffee with a client, mileage to visit a client, etc.
- A percentage of your household expenses, if you have a dedicated home office. (“Dedicated” meaning a room allotted solely for your work, not a desk in your living room or a combination bedroom/playroom/office.) You will need to calculate what percentage of your home’s square footage your office takes up, and that percentage can be deducted from household expenses like utilities, rent/mortgage, and Internet service.
In the end, freelance taxes require a bit more work and time on your part, but they don’t have to be intimidating. Just know what you’re getting into, prepare ahead, and you won’t have any big surprises.
Current freelancers, what other tips would you give for keeping on top of your taxes?