- Contractors and other gig workers in the U.S. who earn freelance income face confusing tax guidelines and difficult requirements for filing your own taxes.ย
- It can be hard to stay organized by yourself, especially if youโre a freelancer for multiple organizations, if you own multiple businesses, or if freelance income is only one of your income streams.ย ย
- Identifying common freelance tax errors to avoid and employing a website/software that helps keep track of the numbers, such as Bench or FreshBooks, can help.ย ย
The most magical time of the year has passed, and given way to the most confusing time of the year: tax season. ย
Freelancing has many great benefits, but there can be some complications come tax time.ย ย
Itโs confusing and difficult, for most people, to know how youโre supposed to file your own taxes when freelance income has been earned from one-time jobs or contract work.ย
The Internal Revenue Service considers freelancers to be self-employed, so these gigย workers have to file taxes as if they were a business owner.ย ย
When youโre self-employed as a freelancer or contractor, you are in charge of reporting your earnings to the IRS, as well as getting your taxes accurately filed and paid.ย ย
Here are some tips as well as things to avoid when filing taxes as a contractor/freelancer.ย ย
1. First, make sure you know what kind of worker you are. Itโs best to outline your role with your employer/company to understand what kind of benefits you get โ if any. Ensure that you know whether you are a freelancer, contractor, or full-time employee. It may sound silly and obvious to know this, but youโd be surprised when tax season comes around.ย ย
2. Track your expenses and earnings during the year. It can be hard to stay organized by yourself, especially if youโre doing work for multiple organizations, or even if you own multiple businesses. It can be helpful to employ a website/software that helps keep track of the numbers. ย
As an example, Bench is an online bookkeeping service that also has a tax resource hub. This service provides a team of small business experts that prepare financial statements every month for you. ย
Another great platform that self-employed workers can utilize is FreshBooks, which is a small business invoicing and billing software. This website provides accurate billing and invoices, as well as accounting services, and automatically track invoices, payments, mileage, and expenses year-round.ย ย
3. Choose a good accountant to do your taxes. While you can do your own taxes using websites such as TurboTax, etc., itโs best to work with an accountant who will do your tax filing for you. They know the best practices, how to get the best tax cuts, and how to follow the law properly through this process. Not to mention you might save hundreds, if not thousands of dollars by going through an accountant rather than a tax website.ย ย
4. Know what tax deductions and credits you are eligible for. One of the reasons an accountant may save you a dramatic amount of money is because of their knowledge of available credits and deductions. There are many tax breaks that freelancers may get, which can include costs related to:ย
- An office in the homeย
- Partial cost of a vehicle used for your businessย ย
- Retirement contributionsย ย
- Office and work supply costs, including cell phones and internetย
- Business insuranceย
- Health insuranceย ย
5. Donโt assume that you wonโt have to pay any taxes. You have to start paying self-employment tax (15.3%) once you earn $400 or more net income as an independent worker. This tax represents the half of a freelancerโs Social Security and Medicare taxes they would usually pay, as well as the half that would usually be covered by a traditional employer.ย
6. Learn about quarterly payments. If you earn self-employment income each year,ย you are most likely required to make tax paymentsย each quarter, rather than waiting until tax time. โ[Filers] generally have to make estimated tax payments if they expect to owe tax of $1,000 or more when their return is filed,โ according to the IRS Estimated Taxes website. โYou may have to pay estimated tax for the current year if your tax was more than zero in the prior year.”ย
7. As a freelancer, donโt expect a tax refund. When youโre an employee, your taxes are automatically withheld from your paycheck. This means that you might get a refund if you overpaid the government throughout the year, but this is less likely to occur if youโre self-employed because youโre the one sending the money you owe.ย
8. Lastly, avoid getting audited by ensuring that you report all income. Freelancers should receive a 1099-MISC form by the end of January from organizations that paid them more than $600 during the previous tax year. But whether or not you receive a 1099, you still are responsible for reporting all your income โ which includes under-the-table cash you might have received.ย ย
Working in the current economy can feel pretty confusing and daunting, but knowing how to advocate for yourself during tax season can help you establish yourself as a true professional, according to Alliance Virtual Offices.ย
