If you are a freelancer and dread tax season and all of its rules, loopholes, and hoops, you aren’t alone. Most freelancers check out during tax season, thanks to hard-to-understand rules and the feared self-employment tax. While the filing deadline has been extended, taxes are complex. Not to worry! We have some freelancer tax tips that will help you get your financial ducks in a row.
Real talk: we’re here to help but we are also in no way legal experts and this is not legal advice. Always consult your own legal counsel on things related to self-employment taxes.
Work from home? There’s a deduction for that.
The IRS offers a home-office deduction that can be used when you use space in your home for work only. Here’s how it works: measure out the space you use for your office and calculate the square footage. Then, divide that number by the total square footage of your home (house, apartment, etc.). That number then gets multiplied by the sum of rent and utilities you pay. The final number is the deduction you can take.
In short, the IRS will allow you to take a deduction for the percentage of your home costs that are allocated for work. It can add up quickly, so don’t overlook this one when tax season rolls around. Just remember, you must be able to prove that the room is exclusively used for business and that your home office is your primary place of business.
Track your expenses
We know you have a lot on your plate, but if you run your own business as a freelancer, bookkeeping is another thing to add. That means tracking invoices, contracts, and business-related receipts and making sense of it in some orderly way. While it may seem like a hassle, skip it and you’ll be sorry.
Not only is it essential for filing taxes, but you should also use this information about your income to inform your budget and to calculate how much you can afford to spend on things like rent, health insurance, and other items each year. You will also need to track how much income you bring in each month in order to calculate the amount you need to save for taxes.
Keeping track of expenses is especially important because these things can be deducted as you do your taxes. Anything you purchase for your business—whether it’s paper for your printer, business cards, or software needed to work—can be tax-deductible if you use it solely for business. That even includes things like home office furniture—as long as you have the receipts.
It can be a lot to keep tabs on, so it may be a good idea to open a business checking account if you don’t have one already. Additionally, keep a record of expenses and receipts for business expenses you plan on claiming on your taxes. While most people won’t get audited, you should have adequate documentation to support business expenses just in case. Many people opt to use online tools like QuickBooks or FreshBooks to help track all invoices and expenses. This can automate a lot of the heavy lifting around record-keeping and free you up to focus on client work.
Pay attention to quarterly tax payments
While the deadline has been extended this year, freelancers should actually be on their toes about taxes year-round. Freelancers are responsible to pay monthly or quarterly taxes, based on the income coming in. Ideally, you set money aside for taxes, though many freelancers forget or overlook this key task.
Freelancers that earn enough to owe $1,000 or more for taxes must pay estimated taxes. Since you are self-employed, there is no one withholding taxes from your pay throughout the year—that falls on you. Also, since there is no “employer” to cover half of your FICA, that also falls on you. You cover 100% as both the boss and the employee, and this is known as self-employment tax.
Waiting until the end of the year to pay taxes could lead to some painful realizations. For one, you’ll likely owe a hefty chunk of your earnings to the government. In some cases, you may owe penalties for paying late.
While it can be complicated to figure out the exact amount owed each month or quarter, experts recommend setting aside 30% to play it safe.
Take advantage of the self-employed health insurance deduction
Good news! There is another deduction for self-employed individuals to help ease the pain of paying taxes. The self-employed health insurance deduction means eligible individuals can deduct up to 100% of health, dental, and long-term care insurance premiums for yourself, your spouse, and your dependent or non-dependent children who are younger than 27.
You may qualify if:
You don’t have other health insurance coverage: As long as you aren’t eligible for an employer-sponsored health insurance plan from your employer or your spouse, you may qualify.
You report business income: As long as you report business income from your self-employed venture, you should be able to claim this deduction, but you cannot deduct more than you earn from your business.
We wrote in a lot more detail about this topic here. Pro tip: if you are a freelancer in need of excellent health insurance, check out our plans here.
Hire someone to help
If all this is still making your head spin, consider hiring a tax professional or CPA to help. It may seem appealing (and cheap) to DIY your taxes, but you may actually end up paying more in the long run. With a string of 1099s and a host of deductions to track and manage, it can be complicated to understand how to optimize how you file.
In addition to helping you save money, working with an expert can help you avoid mistakes and ensure that you have covered everything. Even working with tax software can be iffy since the software does not always pick up on nuanced details about your business that a human might hone in on. Don’t rely on technology to get everything right.
Working with a CPA can benefit you all year long if they are an excellent tax planner. This can help you stay organized throughout the year so that you feel confident and prepared all year long and have a successful tax return.
