There isn’t one most important thing for freelancers to know when it comes to filing a tax return. Well, except paying taxes in the first place!
Instead, there are a variety of incredibly important factors for which you need to understand to best prepare for every tax season. As you begin your tax preparation, it’s important to keep the answers to the following questions in mind.
What is the most important thing a freelancer needs to prepare for tax season?
Each year the most important thing is actually paying your taxes. I mean having the money at your disposal to cover the bill.
Because taxes are rarely taken out of your freelancer paycheck, it’s on your shoulders to financially prepare for your tax liability. The best way to do that is to route at least 30 percent of each paycheck directly into a savings account that is earmarked just for paying taxes. Bonus points if you actually save 40 percent, and, therefore, have some money left to put into retirement savings.
The next important step is staying on top of your quarterly-estimated payments throughout the year. Instead of waiting to pay your tax bill at the end of the year, you need to pay your federal and state taxes every quarter. Otherwise, you may incur penalties and fees for not keeping up on your share of taxes. That means you could pay more than you need to in the long run.
Also, make sure to track your business expenses all year and have proof of those expenses in the form of receipts. If you’re planning to claim tax deductions, then it’s important you have a paper trail in case of an audit.
What is Self-Employment Tax, and how is it calculated?
Self-Employment Tax is levied in addition to the income tax you pay. Commonly referred to as the SE Tax, it ensures you’re paying into programs such as Social Security and Medicare.
The tax rate for Self-Employment Tax is 15.3 percent, which puts 12.4 percent toward social security and 2.9 percent toward Medicare. TaxAct offers a calculator to help you figure out your Self-Employment Tax.
Just remember, the SE Tax does not include all of your tax liability. You have to pay regular income tax on top of that 15.3 percent.
So, does receiving Form 1099 mean I pay more in taxes?
Being a sole proprietor, independent contractor, freelancer, or otherwise self-employed means you receive Form 1099-MISC from your clients. Form 1099-MISC reports the money that client or company paid you for your work. The IRS also receives a copy from the company.
When you work as a contractor or freelancer, most companies don’t deduct taxes from your paycheck like they do for their regular employees. And because of that, you might feel as if you are paying more in taxes than your traditionally employed counterparts.
The truth is, yeah, you kind of are. When you’re traditionally employed, you have the benefit of your employer paying half of your FICA payments, which contributes to Social Security and Medicare. If you work for yourself, you are now responsible for that entire amount. In that regard, you are paying more than your friend who works part-time or full-time for a company.
But instead of feeling like you’re at a disadvantage, you have to think of it in a different light. That extra money is the price you pay to be your own boss and enjoy the flexibility and freedom that comes along with that. Part of being your own boss includes paying your Self-Employment Tax and possibly having a higher tax liability.
I already paid quarterly-estimated taxes. Why am I not done filing taxes?
Even though you made payments to the IRS throughout the year, you haven’t yet filed an annual return. There is a difference between those two actions.
You are still required to file an annual tax return just like a traditionally employed person. You probably also need to file a Schedule C, which reports the income or loss you generated from your business. Your tax return is due the same day as your traditionally employed friends, which for your 2021 tax return is April 18, 2022.
I worked for an international company, do I still have to pay taxes?
The IRS makes it abundantly clear on its website that you are expected to pay taxes on any income earned, no matter the source. “If you are a U.S. citizen or resident alien, you must report income from all sources within and outside of the U.S,” states the IRS.
Failing to pay income earned from overseas sources could result in being charged with tax evasion. If the company you work for overseas fails to provide you with a tax form, you still need to report the income. That’s why it’s important to be diligent with your bookkeeping as a freelancer and always track your income.