Freelancing is a growing employment trend especially since the development of the internet and technology. The flexibility and freedom that working as a freelancer provides allows people to choose their clients, set a schedule, and decide which hours they want to work each day.
Despite its many benefits, freelancing also involves some challenges such as negotiating fair prices, learning how to get new clients, meeting deadlines, and communicating issues with existing clients.
Something every freelancer should pay attention to and take care of is their mandatory tax declarations and obligations if they want to avoid being audited and fined by the IRS.
This article will look more closely at the advice and tips freelancers should be aware of when filing their taxes.
Focus on Keeping Daily Records
Freelancers should treat their work just like a business and an essential part of that is maintaining clear and detailed daily records of sales and costs. According to this site run by tax software specialists, the most important thing to do is accurately record every financial transaction to compile thorough and trusted monthly, quarterly, and yearly records and reports. These will help the IRS to quickly assess your case and calculate your tax, in addition, detailed records can also assist freelancers to understand their business better and how it is performing.
To record income, freelancers are required to request 1099-MISC forms from every client that paid them more than $600 during the tax year. If a client is unable to provide a 1099 or the amount is less than $600, freelancers are still responsible for reporting all income and that includes cash payments.
Understand Freelance Tax Laws
Whether you are running a large company or working as a freelancer, it is essential to have a basic knowledge of how accounting works and the relevant tax laws.
Rules by the IRS state that any freelancer earning over $400 a year is considered self-employed and is required to file taxes the same as any business owner would. The tax rate set by the IRS for self-employed citizens is 15.3%, which consists of 12.4% towards social security and 2.9% towards Medicare.
Think About Hiring a Tax Professional
If you are unsure about accounting and tax rules or too busy working on other areas then you may want to consider hiring an accountant who specializes in filing for taxes.
They will also have a good knowledge of the rules and be aware of any changes in regulations. In addition, an accountant with expertise in tax will also be able to advise you on record-keeping best practices, filing deadlines, deductible items, and required documents.
Calculate Quarterly Taxes and Claim a Tax Return
Freelancers who are estimated to owe over $1000 annually in taxes are required to pay quarterly tax bills, however, they can be calculated by completing a 1040-ES form from the IRS which estimates quarterly tax payments. At the end of the year, the IRS will check what you paid in taxes and could issue a correction in the case of either overpayment or underpayment.
Typically, quarterly payments are due around April, June, September, and January. Generally, failure to make a payment will result in a penalty at the end of the year.
List and Claim Deductibles
Many freelancers miss out on the benefit of declaring expenses to claim tax deductions as they are unsure of what can and cannot be deducted. The fastest way to understand and ensure you list all your deductibles is to seek the assistance of an accountant, deductibles that freelances often include in their tax forms include business meals, electronic equipment costs, advertising, health insurance, the cost of using a home office space, office supplies, transport, and utilities.
Carefully researching which expenses you can list as deductibles to offset your income and reduce your tax liability will leave you with more money in the bank and help you to recoup some of the larger costs related to working from home or as a freelancer in a specialized creative industry.
Prepare for Tax Day
Since tax bills are due every three months freelancers must be prepared and ready to pay their tax bills if they want to avoid paying any penalties. Therefore, freelancers should calculate a percentage of their monthly earnings to set aside each month in a separate savings account. Generally, most accountants recommend that freelancers save around 30% of their total income to cover tax bills.
Working as a freelancer is more popular than ever before due to technological advances and new working practices, however, there are some legal responsibilities associated with tax, and before scaling up and getting more clients, freelancers should understand what filing and managing taxes is involves.