Taxes sometimes can be daunting regardless of whether you’re the employee or the employer. Sometimes it can get even more complicated if you work more than one job that results in many W2 forms or multiple 1099s or a combination of the two. Now let’s add another layer of complexity by being a freelancer!
What exactly does a freelancer get classified as and how do they deal with their taxes, you might ask? Well, we’re here to tell you!
To kick things off, the IRS considers freelancers to be self-employed, therefore, if an income is earned, the freelancer must file taxes as a business owner. Since you’re considered a business owner, you are responsible for paying the self-employment tax, which is 15.3 percent. It seems like a lot, but it pays for Social Security and Medicare taxes, which would normally come out of your paycheck if you were an employee.
Next, make sure you keep a nice, tidy record of your expenses. The IRS expects freelancers have expenses like any other business owner. Keeping a record, and hopefully a digital back up record, of your meals, lodging, office expenses and the like, will help you later when filing your taxes, as these can be tax deductions. Also, you can deduct the costs of traveling to a job, just not traveling to your office.
The IRS also understands that most freelancers work from home. If this is the case for you, make sure you have a designated room as your office space in order to have the home office deduction. If you have a space that functions solely as your office, then the IRS allows you to write off items such as rent and utilities for portions of your home that is used as an office.
Even things like continuing education can be tax deductible as long as the education has to do with your freelancing work. For instance, if you cannot write off culinary classes if you’re a journalist. Makes sense, right?
This all may make sense to people within the tax/accounting world, but the everyday person might not know these little nuggets! Therefore, if you’re thinking about becoming a freelancer, really think about hiring a tax professional, one who specifically works with small businesses, that way you can take full advantages of deductions, tax breaks, and save money. Just make sure they know exactly what you do, the ins and outs of your freelancing, in order for them to really get you all the advantages you deserve. Not to mention, they can also help you with estimated quarterly taxes so you aren’t subject to penalty. For instance, if you have a W2 job, you may be able to avoid paying estimated taxes by increasing your withholding on your W4; making quarterly payments unnecessary. Who doesn’t like the sound of that?!
A tax professional can also inform you on what you can expect to pay tax wise. Keep 30 percent in the back of your mind to keep aside until you get yourself an accountant. Factors such as living in states with high income taxes, not being married, and having no deductions could make that percentage higher. Conversely, if you are married, have a home, children and a lot of business expenses, the percentage could be lower.
As with anyone, it often helps to have an accountant do your tax return in order to get ‘the best deal’ on your return. But with freelancers specifically, it can be a lot to wrap your head around and keep track of by yourself. Doing them yourself or using a free tax program might not help you out too much in terms of tax deductions if you don’t already know the ins and outs those. When in doubt, seek out a professional and in the end, it may very well pay itself off with a tidy return that gets you a refund!