It’s the most dreaded time of year: Tax season.
While many envy the muted alarms and the comfy clothes that characterize a freelancer’s life, when tax season rolls around, no one is jealous anymore.
Keep reading to discover everything you need to know about paying taxes as a freelancer.
Get a Good System
The first and most important step in understanding how to pay your taxes as a freelancer is to get an organized system.
Online accounting software can be worth its weight in gold so that you’re not hopping between several spreadsheets that probably could have been more organized. An alternative to online software is an accountant, and although they are incredibly helpful and can help you avoid costly mistakes, they’re also expensive.
If you’re just starting out and are making just enough to pay your expenses, you’re probably better off working with an online software however if you are making a significant amount, it’s best to hire an accountant.
Here are a few of the top-rated accounting software providers for freelancers:
- QuickBooks Self-Employed
- QuickBooks Online Simple Start
- Zoho Books
When investing in accounting software you should look for certain criteria.
Above all, the software should be simple to use. It should be fairly intuitive to begin with and shouldn’t require a day’s worth of video tutorials to understand. You shouldn’t already need to have a working knowledge of accounting laws to be assured that you’re doing your taxes correctly.
It also needs to have features that are essential to your work. Are you consistently creating invoices, taking credit card payments, digitizing receipts, or creating check stub templates? Make sure that the software has all of these options!
Know What You Need to Pay
The next important element of paying your taxes as a freelancer is to get a general understanding of what you need to pay and about how much it should be.
Self Employment Tax
As a freelancer, you need to pay self-employment tax which is 15.3 percent. This includes the portion paid by the employee and the employer. Salaried employees would have this automatically taken out of their paycheck.
With the freedom of being your own boss also comes the migraine-inducing pain of paying for both parties. Don’t worry, you can deduct the employer portion later on.
While 15.3% sounds like a lot it does include Social Security and Medicare.
You will also need to pay a self-employment tax to your specific state. Some states have very high self-employment taxes and if you’re not sure of yours, it’s recommended to set aside at least 30 percent of your income.
As a freelancer, one of the best ways to keep yourself organized and in the clear with the IRS is to make quarterly payments towards your estimated taxes.
If you make over $400 from being self-employed you should start paying quarterly or you might be subject to a penalty fee. It’s similar to if you were working for an employer, the IRS wants money throughout the year!
Quarterly payment dates are set by the IRS:
- April 15 for income earned January 1 through March 31
- June 15 for income earned April 1 through May 31
- September 15 for income earned June 1 through August 31
- January 15 for income earned September 1 through December 31
Essentially, you’re doing your taxes continuously throughout the year so that one major payment doesn’t sneak up on you.
It’s worth looking into the IRS’s Electronic Federal Tax Payment System to make these quarterly payments. You’ll still have to do the estimations yourself but you can schedule the payments to be made automatically throughout the year.
One of the biggest questions about taxes, especially as a freelancer, is what expenses can be written off. Well, the answer is complex. A simplified as possible, they need to be expenses that everyone in the industry would find reasonable.
So, if you’re a freelance writer, a computer would be reasonable, but probably not a computer fit for intense gaming. You also probably won’t be able to write off a new digital camera unless you’re already running a business that involves photography.
Many professional associations can help you understand specific deductions that will apply for your business and if you work with an accountant they will be able to help as well. When working with an accountant, make sure they understand what your day to day looks like. This will help them understand what items or services are eligible for deductions and which ones could get you in trouble with the IRS.
The next incredibly crucial step in paying taxes as a freelancer is to keep track of everything from receipts to invoices and paystubs. As tempting as it can be to stick everything in an old shoebox and call it a problem for a different day, organize everything digitally and back it up to the cloud.
Create a spreadsheet or use one of the programs listed above to keep everything organized and make notes upon notes about what each transaction was for. Don’t just write “dinner with a potential client”, make yourself a note that says “dinner at X with John Doe to discuss his ghostwriting needs for the upcoming book” This is important info to have if you’re ever audited.
Don’t Panic About Paying Taxes as a Freelancer
Above all, don’t panic! Paying taxes as a freelancer can be an overwhelming process but you’ve got all of the resources that you need at your fingertips.
If your budget is tight, try an online accounting program to help you through, but if you’re still struggling consider this: with the time that you’ve spent trying to learn how to do your taxes, how much money could you have made with other work? If the answer is more than a couple hundred dollars, it’s worth hiring an accounting firm or a freelance accountant to get things in order. You could even ask about sitting down with them to learn the process yourself so that next year it’s not quite as intimidating.
Whatever you do, don’t panic! Keep reading for more resources for freelancers.