If being self-employed is not a big enough challenge, then filing taxes certainly is. Myriad deductions and ever-changing tax laws add to the complexity of filing taxes for freelancers. To avoid paying tax penalties and owing back taxes, freelancers should understand the tax laws and requirements that apply to their business.
To learn more, check out the infographic below created by the University of North Dakota’s Online Master of Accountancy program.
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Freelance Tax Basics
Jumping into the world of freelancing can seem exciting – up until tax time. To help take the stress out of filing taxes, here are the tax basics every freelancer should know.
Taxes, Tax Forms, and Tax Information for Freelancers
There are a few essential taxes and tax terms every freelancer should know about. For instance, the self-employment (SE) tax states that 2.9% of earnings is paid to cover Medicare and 12.4% of earning is paid to cover Social Security. These taxes are in addition to the income tax that would be paid on personal income. Key forms to note include form 1099, Schedule C, and Schedule SE.
What Freelancers Should Know About Sole Proprietorships and LLCs
Freelancers can operate as either a sole proprietorship/individual or as a limited liability company (LLC). A sole proprietorship is an unincorporated entity with one owner, and it’s the most common route taken by freelancers. The tax benefit here is that the individual’s income is taxed directly. The drawbacks of sole proprietorship include the owner not being exempt from business liabilities, and it’s more difficult to obtain bank loans or credit.
An LLC is a corporate business entity where members are insulated from debts and liabilities. Benefits include members being taxed annually and business assets being separate from personal assets. The drawbacks include members being individually liable for fraud and extensive requirements to retain the business.
Should Freelancers Incorporate?
Forming an LLC can help freelancers protect their personal assets in the case of a lawsuit against the business as a result of negligence. An LLC also helps protect an individual’s personal assets when seeking financing. Additionally, an LLC that’s taxed as an S corporation can help owners lower their self-employment tax.
Tax Laws and Requirements Freelancers Should Know About
There are two main tax mandates that should be on all freelancers’ radar. The first is the tax reform bill, where self-employed people can deduct 20% from their freelance income. The second is the estimated tax, where self-employed individuals who owed more than $1,000 in taxes the previous year must make quarterly tax payments.
Information and Tips for Filing a Tax Return
Freelancers can qualify for many deductions not available to W-2 employees. When filing a tax return, freelancers can visit the IRS website to view answers to frequently asked questions. Some of these deductions include health insurance premiums, home office utilities, travel, office supplies, meals, equipment depreciation, marketing, business licenses, and tax preparation.
There are also several important tips freelancers can utilize to make tax time easier. For instance, they should keep track of receipts and bank statements. They should also regularly update income and expenditure records. Additionally, they can deposit 25% – 30% of income into a savings account every month. Finally, they should always stay aware of changes in tax laws.
Taxes are annually due April 15, and estimated tax payment deadlines are April 15, June 16th, September 15th, and January 15th. If you miss a deadline, file the return as soon as possible and pay the highest amount you can to reduce penalties and interest. Penalty rates will depend on how late the payment is made and the tax amount owed. There are also no late filing penalties if a refund is due. If you have a refund, it can be tracked via the IRS2Go app of by calling 1-800-829-1954. If you made a mistake, you can amend it by filing Form 1040X.
Resources and Tools for Managing Finances
As tax laws continue to change, freelancers can benefit from joining organizations that offer free advice ad information, such as Freelancers Unions. There are also several tax services options for freelancers to use. Popular services include Turbo Tax, H&R Block, Tax Slayer, and Liberty Tax.
There are also numerous tech tools that can help freelancers keep relevant tax information straight. These include GoDaddy Bookkeeping, Xero, Wave, and Quickbooks.
Additionally, there are a few resources that freelancers can utilize to help grow their business. Freelancers Union is a free service that allows freelancers to learn about insurance and retirement plans, download tax and insurance guides, and access resources about taxes and banking. Another resource, Spark, allows freelancers to join a local community of business owners, attend regular meetings, and gain information on growing a business and obtaining clients.
For many freelancers, the benefits of being self-employed far outweigh the extra work necessary to track finances. Fortunately, apps, online tax services and organizations offer free assistance to those willing to ask.