Zero alarm clock. Working from the couch. A full day yoga pants wardrobe.
Freelance work certainly has its advantages. Tax returns are not one of them.
Whether you are considering making the big leap into the world of freelancers or if you are already finished, your tax situation does not have to be The complicated – we promise!
Here's what you need to know to keep Uncle Sam happy while navigating your business.
How do you pay taxes as an independent entrepreneur?
The following recommendations vary if you have selected a corporate structure such as an S-Corp or an LLC. Since sole proprietorship is the default setting for most freelancers, we focus on what these taxes look like.
The first is quarterly payments.
Estimated quarterly taxes: how much do you have to put aside?
If you make money as a freelancer, the transaction takes place directly: you enter a price, perform the service and your customer pays you – without withholding money to cover taxes or benefits.
Of course, the government wants cuts to continue even if you are self-employed, which means that it is Your Responsibility to hand out this part. A good rule of thumb: set aside about 30-35% of every paycheck you make to cover your federal taxes.
This includes both federal income tax – which is organized by clinch and will likely be between 10 and 24% if you don't out of the ordinary good and self-controlan additional tax on independent contractors of currently 15.3%.
Rather than withhold these taxes from every paycheck, send them quarterly using Form 1040-ES. The quarterly tax payments are due in January, April, June and September super easy to file online, However, you can also pay by phone or post. the address varies by location.
Note that the 30-35% you set aside may not cover state or local taxes, which vary by location. For example, New Mexico charges a small business fee in addition to the regular state income tax Gross receipts tax to the "the privilege of doing business”Here – that ranges from 5.125% to 8.6875%, depending on your county.
More about self-employment tax
Self-employed persons, who are often classified as punitive by freelancers, should cover the contributions of independent entrepreneurs to social security and medical care with the self-employment tax.
As you may have noticed from your Paystubs, the percentage retained for these programs is only 7.65% if you do a traditional job. This is because your employer pays the other half.
Independent contractors – if they earn more than $ 400 in freelance earnings – must pay the full 15.3% to pay their full contribution.
Yes, freelancer, it doesn't just feel like you're paying more taxes. You actually to do pay more because you don't have an employer to share the bill with you. We are sorry.
The good news is that this percentage is levied against your tax network Income … which means you calculate it to You take your deductible costs. (More on that in a minute!)
The dreaded April tax return
Just like a "normal" worker, you still have to file a tax return if you have a freelance income of at least $ 400. As long as you keep up with your quarterly numbers, this shouldn't be too painful. However, if you missed payments or neglected the self-employment tax, you may owe the IRS.
Your April return should state the total of your earnings that will be used to calculate your tax bracket and total tax burden. For freelancers, of course, this means that you have to carefully record every cent you earn.
Calculation of your total income
Any customer who pays you more than $ 600 in a year must submit a 1099-MISC form on your behalf, which you will receive at the tax date instead of a W-2. This shows your earned wages, but no taxes withheld. As an independent contractor, this is your responsibility.
Even if you earn less than $ 600 with a customer, that income still counts towards your total annual total, which means you have to state it in your return.
By the way, although it is tempting to underestimate your income to pay less tax, there are good reasons not to do so – namely high fines. Seriously, do you really want to go through the hassle of an exam? Save time and money in the long run and just spit out what you owe.
Are you still getting a W-2?
Freelancers are not exactly known for their reliability or health insurance. Many freelancers therefore work part-time for others in addition to their part-time job.
If you are, your employer will still need to submit a W-2 for you. You will receive it sometime in February in anticipation of the big day in April and will need it to submit your return. It shows your earned wages, social security contributions, withheld federal income and Medicare taxes, and more.
This affects your overall tax burden and may be a good reason to get professional help.
What can you deduct as a small business owner?
Now for a tax issue that we can all love: deductions!
One cool thing about freelancing: As a small business owner, you can make certain business-related deductions that lower your overall tax burden and improve the profitability of your business.
The IRS language for deductions is fairly open: "To be deductible, business expenses must be both ordinary and necessary." So you can make an argument for deducting a range of costs.
Some of the most common Deductions for freelancers This includes the cost of your home office, office supplies and travel expenses for work. However, you can also deduct meals and entertainment related to customer meetings, as well as professional services such as that of an accountant.
Speaking of what …
Should you hire an accountant?
Just as nerve-wracking as life in a purely digital world, the Internet Has The tax return has been simplified considerably. Even freelancers can benefit from the sophisticated software of companies like us TurboTax or H&R blockthat are inexpensive and simple.
In some cases, however, it is worth hiring professional help. As if …
1. You have a W-2 job (or three) next to your freelance company.
If you do a traditional job, it means that you have already paid part of your social security and Medicare debts. This can make your return on self-employment considerably more difficult. (Hey, we were all there.)
An accountant can help you figure out exactly how much you actually owe, which can ultimately save you money, even after you've considered their fees.
2. You have chosen a more complex business structure, e.g. B. an LLC with the S selection.
While most freelancers operate as sole proprietorships, incorporating a growing freelance company can bring benefits. For example, by moving to an LLC and Taking the S Corporation optionYou could avoid paying self-control on a significant portion of your income.
All in all, it is a complicated – albeit completely legal – system in which you employ yourself as an employee and pay regular income taxes. It is known aspassage"Tax structure and other paperwork oddities means that you are submitting a W-2 as both an employee and an employer.
And at the time of the tax, there are more such documents. A good accountant can make sure you have crossed all of your T's and I have dotted – and when it comes to the IRS, you want to be as specific as possible.
3. You just don't want to deal with it.
Many accountants charge a few hundred dollars to make the accountant happy. That is money well spent. For freelancers. For each.
Although taxes are much more complex for independent contractors than for those who do a traditional job, it is difficult to compete with the freedom and flexibility of a freelance lifestyle.
I mean yoga pants. And * only * yoga pants. Forever. The CPA fees are absolutely worth it.
Jamie Cattanach's work has been shown at Fodor, Yahoo, SELF, The Huffington Post, The Motley Fool, Roads & Kingdoms and other outlets. Find out more at www.jamiecattanach.com.
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