When I first began thinking about pursuing a career as a freelance writer, I envisioned my days working on my own in my pajama pants, cranking out work that made me proud. But do you know what part of the process I didn’t give as much thought to? Filing taxes as a freelancer.
That’s right. Utter the two small words “tax time” to a group of freelancers, and you’ll immediately inspire a collective groan. Dealing with tax payments is one of the worst parts of being a freelancer (well, that and buying your own health insurance).
So what do you need to know if this is your first tax season in the world of the self-employed? Here are five essential tax tips for freelancers:
- Know that you need to pay your taxes, despite the myths you may hear.
- Start to get ready early.
- Keep your documents organized.
- Make sure you have the right forms.
- Enlist the help of a professional.
1. Recognize That You Need to Pay
There are a lot of myths about how taxes work in the freelance world. But it’s important for you to recognize that they’re just that — myths. There's one that you’ll hear echoed time and time again that goes something like, “I didn’t earn enough to have to pay taxes.”
Many assume that if they earned less than $10,000 (or something similar), they’re too small for the IRS to bother with. Spoiler alert: That couldn’t be more false. Yes, there is a threshold that dictates whether or not you need to file. But it’s smaller than most people assume. In fact, it’s a measly $400.
So that means that if you earned more than $400 as a freelancer throughout the year after expenses, you absolutely must file your taxes. Why? Well, for starters, you need to pay your self-employment taxes (more on those later) in addition to regular income taxes.
Don’t fall into the trap of thinking that your business is too minuscule for taxes — that’s almost never true.
2. Start Preparing Early
One of the biggest tax tips for freelancers that I wish I'd known in my first year? Prepare early. During my first year as a freelancer, I didn’t stay on top of taxes as well as I should have. My 1099 forms began arriving in the mail, and I threw them all into a stack on my desk to deal with later without even giving them a second glance.
The night before my appointment with my tax accountant, I spent hours sorting through everything, only to find an error on one of my forms.
A frantic scramble followed. The moral of the story? Leave yourself plenty of time. It’s not always an easy process, so you’ll often be glad you gave yourself a buffer.
3. Stay Organized
In a similar vein, tax time will be much easier if you keep yourself organized throughout the year, and then leave yourself some time to double-check that you have everything set to go before you file.
From the tax forms and tracking of your income to logging your expenses and keeping the necessary receipts, there’s a lot to keep organized when you’re a freelancer.
Find a system that works for you and then stick with it for the entire year. For me, it’s a combination of QuickBooks, an Excel spreadsheet, and an accordion file for my receipts.
4. Get the Right Forms
Paperwork, paperwork, paperwork. There seems to be a never-ending avalanche of forms when filing taxes as a freelancer. This can ultimately add to your confusion.
However, it’s important that you get your hands on the correct forms that you need. And there’s one that many people often forget about: their self-employment tax, which covers Social Security and Medicare.
If you worked for a traditional employer, your company would deduct taxes from your paycheck, match that contribution, and then send taxes to the IRS. But as a freelancer, you’re left to cover both the employer and the employee share, which is where self-employment tax comes into play.
As the Social Security Administration tells us, you need to complete the following federal tax forms by April 15 after any year in which you have net earnings of $400 or more:
- Form 1040 (U.S. Individual Income Tax Return)
- Schedule C (Profit or Loss from Business) or Schedule F (Profit or Loss from Farming) as appropriate
- Schedule SE (Self-Employment Tax)
Luckily, the IRS makes all of these forms conveniently accessible on their website, so you should be able to easily get your hands on the paperwork you need.
And remember that, according to the Social Security Administration, “Even if you don’t owe any income tax, you must complete Form 1040 and Schedule SE to pay self-employment Social Security tax. This is true even if you already get Social Security benefits.”
5. Consult a Professional
Let’s face it: Even with all of the tools, resources, and information available, navigating your way through filing taxes as a freelancer can be complex at best.
So when in doubt, one of the best tax tips for freelancers is to set up an appointment with a CPA (certified public accountant) — especially one who specializes in working with freelancers. Yes, his or her expertise will cost you some money. But in the end, it’s worth it to know that you’re getting things done the right way. And even better? That appointment is a tax deduction for you!
For those who want some help, but don't want to hire a CPA, H&R Block has a consult-with-a-professional program that allows you to complete your own filing, and then have a professional review it. It's cheaper than a CPA, but more expensive than traditional tax software like TurboTax.