As a freelancer, you have unlimited potential to earn money and fulfill your needs because of your freedom. In other words, you own your working schedule. You can work from anywhere as long as you have your laptop and internet are connected. I have been working with many freelancers, their lifestyles are very appealing because of the flexibility while still paying the bills. However, when the tax season comes around, things can get stressful if you have not prepared properly. Freelancer taxes are not complicated and stressed as what you imagine. The goal is to know what is expected from you and plan ahead.
The following things are what you need to know if you are going to file this year tax return as a freelancer.
Do I need to file my tax return?
If you are a freelancer, and your gross income is $400 or more during the tax year, you will have to file a tax return.
For example, you are a freelance writer, and you earned $6,000 gross income from your freelance business. You have $5,700 in deductions, so your net profit would be $300. You still have to file your tax return, because your gross income is above $400.
If I need to file my tax return, what next?
First, let's gather together all sources of income. In generally, freelancer income will be reported on 1099-MISC, but it is the case for all clients and freelancers. You do not necessarily receive all the 1099-MISC to file your annual tax return, because your clients will not issue a 1099-MISC if they pay you less than $600 in total. Also, some client now may pay freelancer through Paypal or other online payment systems, then you will probably receive a 1099-K if they pay you more than $20,000 or 200 transactions.
Having a separate business bank account is highly recommended, so you can deposit all your freelance related income into that bank account. It is an easy way to track all sources of your freelancer income.
Second, let's file an annual tax return. You will also likely have to make quarterly estimated tax payments to cover your employment taxes. You can use the Form-1040 ES to figure out what you owe. For your annual tax return, you will need to report your income and expense on Schedule C tax form along with your Form 1040.
Do I need to pay tax?
In standard full-time employment, your employer usually takes money out from your paycheck for taxes to pay the IRS on your behalf throughout the year. It is called withholding. As a self-employed freelancer, it is your responsibility to make sure these taxes are paid. It is called Estimated Quarterly Taxes, by definition, it is an estimated of the taxes you owe every quarter.
According to IRS, you should pay tax quarterly if you expect ow at least $1,000 in taxes throughout the year. If you didn’t pay enough tax throughout the year, you may have to pay a penalty for underpayment of estimated tax along with the remaining taxes when you file your annual tax return. Furthermore, filing the Form 1040-ES can help you approximate how much you will make during the year and then determine your estimated taxes based on your projected earnings.
If you overpay your estimated tax, you will likely to receive the excess amount back in the form of tax refund or apply to the next year tax payment.
For estimated taxes, the year is divided into four payment periods with a specific payment deadline for each period:
• January 1–March 31 (Deadline: April 15)
• April 1–May 31 (Deadline: June 16)
• June 1–August 31 (Deadline: September 15)
• September 1–December 31 (Deadline: January 15 of the following year)
My tax bill is too high. Is there any way to lower my tax?
Short answer: Yes. You can deduct a lot of stuff
Long answer: Tax deductions lower your taxable income, potentially reducing your tax bill.
Freelancers can deduct any expenses related to their business. The IRS has a guideline for what is deductible as a business expense for a particular industry. However, those business expenses are “ordinary and necessary” for the operation of your freelance business.
Some of the most common deduction for freelancer includes:
• Office supplier
• Computer equipment and software worth less than $1000
• Advertising and marketing
• Phone and internet fee
• Travel and business meal
• Home office
The advice for the freelancer to keep track of expense throughout the year is to save all your original receipts and invoices. There are many ways to keep track of your expense, but the idea here is simple. You just need to organize all the receipts and invoices and broken down by expense category.
Home office could be one of the big deduction you don’t want to miss. Regardless you own or rent the home, you can get to deduct a portion of your home that you use as an office. You can also deduct utilities, improvements, and supplier of the portion of your home office. For example, you use 30% of your home as a home office, you can deduct 30% of the utility bills from your freelance income. Moreover, the IRS has rules of what can be deducted as a home office. You can’t use your kitchen as your home office if you are a freelance writer.
What are other ways to lower my tax bill?
Let's take a health insurance deduction. As a freelancer, you may be eligible to deduct insurance premiums that you pay for medical, dental, and qualifying long term care insurance coverage for yourself, your spouse, and your dependents.
Let's think about saving for retirement. The notion of putting away cash for the future may sound unreasonable for some freelancers especially they need cash to run their freelance business. However, when you have additional cash, you should consider of invest to your retirement fund, it will not only help to save money for your retirement, but also deduct your freelance business income in term of lower your tax bill. Generally, freelancers can contribute to A Simplified Employee Pension Plan (SEP IRA), which is designed for self-employed individual and small business owners. You can contribute 25% of your net self-employment income, up to $55,000 for 2019.
Still have questions in your head? Let's take to a tax expert!
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