It’s that dreaded time of year again – tax season.
I know, I know. You’re thrilled. Try to remain calm.
As a freelancer, there are many luxuries we have when it comes to conducting business. We can set our own hours, the commute is only as far as the home office, we can wear comfortable clothes, and we can take breaks or days off without having to clear it with someone.
But, then Tax Season comes around again to give us a huge wakeup call.
We trade in the boring drudgery of a regular 9-5, but have to pay for it each tax season. We have to do our own taxes. And it’s not exactly the easiest thing in the world.
Many freelance writers get so excited about their income for the year, only to think about packing it all in when they get the tax bill for thousands of dollars and suddenly have to owe back taxes.
Avoid the stress and tears, and follow these tips to make sure Tax Season is as easy as possible:
Always work with a professional
This is a big one, and will help you avoid a lot of stress and mistakes that could be hard to bounce back from.
Always, always, ALWAYS work with a tax professional. You want to look for one who specializes in working with freelancers or at least small business owners.
The way these taxes are prepared are different than for other professions, so you want to make sure your accountant is experienced in this type of tax preparation.
Yes, it’s going to be expensive. But, that expense is most definitely worth it. They will be aware of things you may not, such as additional deductions and write-offs.
Keep track of how much you need to pay
Take some time to gain a basic understanding of how your taxes are prepared and what you need to pay. There’s nothing quite like being surprised with a $2,000 tax bill at the end of the year.
As a self-employed professional, you need to pay self-employment tax, which differs per year. This includes your Social Security and Medicare taxes, which normally would be automatically taken out of each paycheck.
This has increased for 2017, when the wage base jumped from $118,500 to $127,200. This additional $8,700 of your net profit is subject to Social Security tax. You end up paying more, even though the total self-employment tax rate of 15.3% has not changed.
Then, you may have a self-employment tax that varies from state to state. If your city is one with a particularly high tax rate, you will want to take that into account as well. This is where the biggest surprise tends to come from.
Working with a professional will ensure all of this is clear and easily understood but, until you start working with one, start setting aside 30% from each payment you receive. This will at least get you in the right payment range, even if the actual amount you end up paying is higher or lower. If you live in a high tax state, it’s best to set aside 40%, just to be on the safe side.
This doesn’t take into account deductions, marital status, number of children, or any other pertinent information your tax professional can help you sort out.
Pay estimated taxes each quarter
Once you have a tax professional lined up, consult with them to figure out what your projected taxes would be for the year, based off of your projected income.
If you’re profitable, you want to start paying into your taxes each quarter. Not doing so can result in a penalty, because the IRS wants money from you all throughout the year, just like they would if you had a regular employer.
This requires a tax professional because, unless you are one, you’re likely to be WAY off this number. It happens. A lot. Don’t chance it.
Explain your business operations to your tax professional
Explain all the details of your business operations, because this will help your tax professional find all the deductions and credits you are entitled to.
Explain what your business does, what your business expenses are, and how those expenses relate to your business operations. Keep track of them with a business expense page, such as the one offered by Quickbooks by Intuit.
There are thousands of ways to track your expenses, ranging from software like Quickbooks to Excel spreadsheets. Heck, you could even use a notebook, as long as you keep everything together and make sure it’s accurate.
However, most professional freelancers do suggest you go digital when it comes to tracking your income and expenses.
If you get a receipt for something, you don’t have a lot of time until the paper gets crinkled or the ink fades into a hard-to-read mess that vaguely resembles something stating you paid $7 for a latte you downed in a quick minute.
Or is that just me?
Just me? Okay.
If you’re tech-savvy, you can implement financial account services such as Wave or GoDaddy Bookkeeping, both of which are free.
Many freelancers also use Evernote, into which they put pictures or scans of their receipts and invoices.
I personally keep track of everything in Microsoft Excel, with a page for income, a page for regular business-related expenses (such as PayPal fees and website fees), and then a page for receipt expenses. I list the name of the client/company next to each value, and then total it up at the end of each month.
It’s not fancy, but it works well for me.
Even if you have everything accurate down the last penny, it’s still recommended that you have your tax professional/accountant look over your expenses and income for each quarter. This helps you keep on track, and tell you where you are in regards to your projected expenses and projected income.
Keep in mind, though, quarterly isn’t really quarterly.
The dates are:
· April 17 for income earned January 1st through March 31st
· June 17 for income earned April 1st through May 31st
· September 17 for income earned June 1st through August 31st
· January 17 for income earned September 1st through December 31st
As you can see, the June 17 payment spans across only two months of income, but the January payment spans across four months. Even still, you are expected to pay the same amount each quarter.
If you supplement your income…
Many newer freelancers are not full-time, or are not as profitable yet, so they supplement their income. If you do this, and receive a W-2, you need to talk to your accountant about that.
You may be able to avoid paying certain aspects by increasing the withholding you have with your W-2 jobs.
Let’s say you claim 2 or 1 on the W-4 you’re given, but then drop that down to 1 or 0 in order to have more taxes come out of each paycheck.
This would mean your quarterly payments may not be necessary.
If you’re unable to pay the full amount of taxes, you DO still need to file. You should file on time and pay what you are able to, as this will reduce the penalties and interest you are fined. Then, call the IRS to find out what you still need to do and what your options are going to be. Sometimes, you can get an extension. Sometimes, penalties will be waved. It depends, so you need to get in contact with them.
If you owe back taxes, talk to your accountant and the IRS. You may be able to get an Online Payment Plan with lowered interest rates.
Regardless of where you stand, it’s important to keep track of EVERYTHING with a system that works for you.
What are some of your top tax tips for freelancers? Let me know in the comments below and, while you're here, please share this post!
*** I am not a finance or tax professional. This is based off experience and thorough research, as well as the expertise of a tax professional. ***