Three Important Tax Tips For Freelancers
Tax season is here!
If you’re a full-time employee, you might be thinking: “YES! I love getting my tax return!”
Whereas if you’re a freelancer– well, I can hear your long sigh of disappointment from here.
Yet your favorite/least favorite time of the year is fast approaching, and you might be looking for ways to get the most out of your return (or reduce how much you owe). Especially if you are one of the twelve percent of Americans who work in the ‘gig economy,’ you’ll be looking for ways to cut out how much you owe the government.
Traditionally, freelancers and contractors do not have a taxed income, which means filing time can be extra stressful. Tax returns can turn into mountains of forfeited money really fast, and the IRS is ruthless.
Yet taxes don’t always have to be a chore. Here are some tips to help make your yearly filing smooth and easy. Who knows, maybe you’ll even get some money back this time!
1. The importance of staying organized
The most common tax tip for freelancers that you can find on the web is simply this: file all relevant income. This includes your side hustle, your retirement, your health savings account, and all of those little jobs you did for people around the world. It can add up fast, and it can get disorganized far too easily.
Make it a habit to keep all your invoices, receipts, and contracts organized so that every tax season becomes a breeze. It will also help you in your everyday finances. There are plenty of programs that exist that will help you create templates and track payments, but this will also help you decide who owes you a 1099-MISC or other forms. 1099-MISC forms are the most common freelance tax form you’ll come across, which is required for individual clients that paid you over $600 for the previous year.
Another important suggestion that pops up often: get advice from a tax professional. As on writer, Laura Shin, shared with Forbes in 2014: “Yes, a good accountant can be expensive. But that investment can also save you money, time and headaches.” She shares a story where one freelancer initially used Turbotax to file, but later worked with a tax professional to re-file. The tax professional noticed that the freelancer filed for “educational expenses,” which the freelancer didn’t realize was especially made for teachers who bought supplies for their classroom.
Professionals can help you avoid these missteps, and will likely know plenty of ways to help you get the most out of your deductions.
2. Be Prepared to Owe Money
If you work freelance as your full-time job, you’re going to owe money. Since traditional full time jobs take out money for Social Security and Medicare taxes, you will have to do that yourself as a self-employed worker. You are essentially functioning as a small business, and will have to file taxes as if you are one; typically on a quarterly basis. Darn, those chains of bureaucracy.
For 2016 filing, the percentage of income tax owed to the government for Social Security and Medicare is hovering around 15.3% of your company’s (or personal) income, after deductions. These chunks of your income have to be filed quarterly, but are also taken out during normal tax filing season.
One of the best suggestions for this hurdle is to save up money in a separate savings account throughout the year and then pay when you’re filing. That way you’ll be able to (hopefully) avoid owing back taxes to the IRS and not waste away your personal spending or savings account.
Of course, there are plenty of ways to reduce the amount of money you owe. You don’t have to get creative either, you just have to stay organized.
3. Maximize deductions
There are a few ways to limit the amount of money you will owe as a freelancer during tax time. Luckily, as a self-employed individual, any purchases made to benefit your work (desk, computer, gas for the car, camera, furthering your education in the field, etc etc) is considered by the government to be a business expense and are thus tax deductible. This means if you made $50,000 dollars last year, but spent close to $15,000 on purchases for the business, your overall profit was $35,000. That $35,000 is the amount of money the government will tax. The $15,000 is deducted.
There are, of course, limitations on what counts as a business expense. According to the IRS: “To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary.”
Seasoned tax experts suggest keeping your receipts for everything you purchase that you plan on deducting; bank statements don’t count. And don’t throw them away after you file, either. As one accountant, Jonathan Medows, told Forbes: “Medows warns that the self-employed (that’s IRS-speak for “freelancers”) tend to be at higher risk of audits, so it’s critical to keep detailed documentation of your expenses. “You don’t want to cheat yourself,” he explains, “but you also don’t want to cheat the government. You want to be able to look someone in the eye and explain and justify your deductions.””
Medows also recommended keeping receipts for up to six years after filing. You never know when the IRS will come knocking to check your tax returns from three years ago.
Itemizing your taxes is another way to potentially save more money. When you itemize, you can deduct what you owe through compounding interest rates on student loans or home mortgages, which can help whittle away some of what you owe. There are other options, as well, that can help you when you itemize, but it’s important to keep in mind that when itemizing, you cannot file for a standard deduction. It’s one or the other, and you can’t go back and choose. A tax professional will be able to help you decide which will give you the better deduction.
In the end, take this information as simple advice, but don’t rely on it. Seek out a professional accountant that can help you narrow down what you owe and what you can deduct. No one wants a visit from the IRS, and as a freelancer you’re already under scrutiny.
Tax season can either be a breeze or be a burden. If you’re a freelancer, it’s most likely the ladder, but you don’t have to let that get you down. Working independently comes with its own hitches, but it still provides you with a sense of freedom to pursue what you love.
Happy Tax Season!