Are you living life as a freelancer? You know that there are a lot of uncertainties that go with it. You don’t know where your next client will come from. You have to hustle a lot.
You also have to pay your own taxes. This usually causes a lot of confusion among freelancers. It can also get you in trouble with the IRS if you don’t know what you’re doing.
Read on to learn how to file taxes for freelance work so you are on top of your taxes each year.
When to Pay Taxes for Freelance Work
There are more people working side jobs and earning money from freelance work than ever before. Some freelancers don’t recognize that they need to pay taxes on their freelance income.
Not all freelancers have to pay taxes on their income. The IRS only requires it if you made more than $600 during the year from freelance work. That’s not per client, that’s the total amount earned from freelancing, no matter the source.
Freelancer’s Tax Responsibilities
The main difference between freelancers and employee people is the amount of tax you’re responsible for.
As an employee, you pay federal income taxes, state income taxes, 1.45% for Medicare and 6.2% for Social Security. Your employer will match your Medicare and Social Security contributions.
Since you don’t have an employer match your contributions for Medicare and Social Security, freelancers are responsible for the entire amount of 15.3%. That’s the self-employment tax.
You still have to pay for state, municipal, and federal income taxes as well.
On a positive note, freelancers can write off business income. You can lower your tax liability by investing in tools, courses, and supplies that are for your business. You need to make sure that you can keep the receipt and be able to justify the business expense.
How to File Taxes for Freelance Work
Now that you know that you do need to pay taxes, how do you file taxes for freelance work? The first thing that you’ll do is gather your income statements for the year.
You may have received 1099-MISC forms for work that you did throughout the year. If you were an employee at any point during the year, you’ll need to get a W-2 form from your employer.
Get Additional Documentation Together
If you paid for health insurance through the Healthcare Marketplace, you’ll need to get that documentation together. The Marketplace will send Form 1095-A to you.
You’ll also need forms that showed how much student loan interest you paid, business receipts, and any other tax documents.
Healthcare Marketplace and Taxes
When you initially filled out your application on the exchange, you had to predict how much income you would make this year. That’s not easy to do for a freelancer.
Your tax credit is based on that number. If you used the entire tax credit available and you made more than you put on your application, you could owe additional money in taxes. You took more than you should have in tax credits and they need to be paid back.
Tax Deductions
As a self-employed person, the IRS sees you and your freelance business as the same thing. You’ll file a 1040 form and attach a Schedule C form for your business expenses.
There are also above the line deductions that you’ll take as well. Those include the standard deduction, medical expenses, student loan interest, and health insurance premium payments, IRA contributions, and a portion of the self-employment tax.
Your itemized deductions include home office deduction, IT support, and the 20% pass-through deduction and all of your business expenses.
Calculating Taxes
Once you have your numbers and deductions together, you need to fill out your 1040 form accordingly. This is where it can get complicated. You should use a professional accountant for this part.
However, if you insist on doing taxes yourself, you should use some kind of tax software. That will cut down on the mistakes that you could make when filing yourself.
You may qualify for free tax filing software that will make the calculations and file your state and federal taxes for you. You’ll also get instructions on how to pay your taxes and where to send the check.
How to Save For Taxes
Tax time can take you by surprise if you don’t plan ahead. Even if you pay estimated taxes throughout the year, you still may wind up owing money to the IRS. For many freelancers, they don’t save throughout the year, so they struggle to pay a huge tax bill at once if they can pay it at all. That can lead to IRS problems.
You want to avoid being in this position as much as possible. The best thing you can do is set aside a percentage of money as soon as you get it.
How much depends on your adjusted gross income. At the very least, you should set aside 15% to cover your self-employment taxes. Most tax experts suggest setting aside 25% of your earnings and apply them towards taxes.
At the beginning of the year, review your finances with your bookkeeper or accountant and come up with a number that’s right for your situation.
It does require a lot of discipline to set that money aside. What often happens is that freelancers will dip into that money during slow times, hoping they can make it up later.
That rarely works out well for them. Once that money is set aside, consider it untouchable.
Paying Taxes for Freelance Work
Freelancing work offers the ultimate freedom. You get to choose the work that you do, when you do it, and where you do it. It can be stressful at times, but it’s more rewarding than working for someone else.
There is an additional responsibility as a freelancer because you have to pay taxes. Learning how to file taxes for freelance work is complicated. You may want to contact an accountant before doing taxes on your own. That will ensure that you’re doing the right things and you’re staying out of trouble with the IRS.
Do you want more great articles? Check out this article about what happens when you file your taxes late.