Are You a Freelancer? Get a Handle on Your Taxes
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Freelancing brings a lot of great benefits to the table. You get to control your own schedule. You can charge what you want for your services. You can work from practically anywhere. Yet being a freelancer also comes with its own set of challenges. One of those challenges is something that everyone dreads: taxes.
What’s so different about taxes for freelancers?
Regardless of whether you’re self-employed as a freelancer or working in the corporate world, you must pay taxes. The main change (and the change that scares people the most) is that no one will withhold your taxes for you. Consider the last paycheck you received from an employer. Your paystub showed you how much was withheld by the company for various federal and state taxes. So, the money you got in your paycheck was yours (until it’s time to pay the bills!).
As a freelancer, you get paid from a client (or clients), and taxes aren’t removed from it. It feels like you’re getting a big, fat raise. However, quarterly or yearly, you’ll still need to pay federal and state taxes on that money. And unfortunately, it’s up to you to figure out exactly how much money to withhold and pay in.
Choose the best legal structure for your business
Self-employment taxes can change depending on how your business is structured. What does that mean for you? It means that if you start as a sole proprietor, your tax situation is different than someone who registers their business as a pass-through entity like an S corporation.
The good news is figuring out which business entity will best affect your taxes isn’t very difficult. You can research on your own, talk to a lawyer, or talk to an accountant. Paying money to a lawyer or an accountant may seem expensive, but it helps protect your business in the long run. You can also write it off.
To learn more about how choosing the right business entity can positively affect your tax situation as a freelancer, read FormSwift’s Tax Reform Guide for Freelancers.
The 1099-MISC and you
Think back to your days as an employee. Remember how you’d get a W-2 at the end of every tax year? A W-2 tells you how much you made during the tax year and the amount you paid in for both federal and state taxes. You then use that information to file your tax return. As a freelancer, you don’t get a W-2. So, what do you get?
At the beginning of every tax year, your clients should ask you to complete Form W-9. A W-9 provides them the information they need to complete Form 1099-MISC. If you earn at least $600 from a client, you should receive a 1099-MISC. That’s true for every client that pays you $600 or more in a tax year. They should mail that form to you by the end of January of the following tax year. For instance, if you made $1,200 from a client during 2017, you should have received Form 1099-MISC from them by the end of January 2018.
The 1099-MISC is like a W-2 for freelancers. It shows you the total that you earned, and it shows any withholdings (such as backup withholdings) made by the client who paid you. Remember, it is not the responsibility of the client to withhold taxes on your behalf. You need to pay taxes on what you’ve earned.
Separately, if you hired a subcontractor to help with various projects for your freelance business throughout the year, you may be on the hook to issue a Form 1099-MISC as well. For instance, say you hired a photographer to take pictures for your website or social media accounts. If you paid that photographer more than $600, you have to issue him or her a 1099-MISC reporting that payment since their work is used for business purposes.
Set aside 25 percent of your earnings for taxes
The general rule is to save around 25 percent of your freelance earnings so you have enough money for taxes. Of course, how much you need to set aside depends on the tax bracket you fall into because of your income. It can be hard to determine what you’ll make for the first year or two of freelancing. It also depends on whether you’re filing as single or married. For the 2018 tax year, single filers fall into the 22 percent tax bracket if they make between $38,701 and $82,500.
Get the right bookkeeping software
One of the easiest (and cheapest) ways to get a handle on your taxes as a freelancer is to choose and use the right bookkeeping software. It’s much easier to take care of your taxes if you faithfully record what you’re making and spending on your business. You can run specialized reports and compare them to your receipts and to the 1099-MISC forms you’ve received before preparing to file your taxes. Bookkeeping software is inexpensive and can save you a giant headache.
Do your taxes before they’re due
TaxAct encourages you to file your taxes by the tax season deadline. Using the tips you found in this article and FormSwift’s Guide to Surviving Tax Reform as a Freelancer, you can make the federal and state filing process as a freelancer easy. And remember, if you don’t file your taxes on time, you are subject to late filing penalties by the IRS. Don’t worry, though. You can use TaxAct to file an extension by the deadline, if necessary.
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