Freelancing is playing an important role in today’s life. If your earning is more than $500 as a freelancer, you must include it in the tax return file. It is our responsibility to include income in our annual tax return. You need to understand what kind of deductions you qualify to save money. Running your own business is quite helpful for fresh graduates. You can start your freelance business at home, set your hours, be your own boss, and select your type of work. There are thousands of projects and it’s up to you whether you want to pursue them or pass them on. If we look worldwide, the freelance workforce is in millions and 35% belong to the US. They perform freelancing as a temporary job or long term career path. According to a survey conducted in 2019, 57 million gigs are made on freelance.
Freelancing comes with many challenges, to get a project you need to negotiate with the client and adjust a fair price for your work.
Getting more projects is not that easy and you have no idea where your next job will come or if it will come at all. Many freelancers do not think about taxes. Now freelancers who are doing other jobs as well, are also paying taxes. Whereas self-employed should stay on top of their tax obligations and need to pay them on time.
Here we are going to give you tips from tax experts so that you get prepared for tax season.
Basics About Freelance Taxes: First of all you must know the difference between FICA and IRA. Let’s review some basics of tax as they relate to freelancing. “All business owners, whether they are freelancers or CEOs need to have a basic understanding of accounting and taxes so they can make their money work for them,” said Alexis Krystina. If you earn a good amount of money in a year then it requires you to give taxes. You need to pay a self-employment tax of 15.3% which includes social security and Medicare taxes.
Forms For Tax Return File: You need a W-2 form as a traditional employee. If your client pays you more than $600, you must report it to 1099-MISC income tax.
When Should You Pay Taxes: You need to pay your taxes by April 15th. If you haven’t paid on time, you may have to pay an additional fine. Pay your quarterly taxes on time.
Hire A Tax Professional: An accountant will help you better in this case. If your income stays the same throughout the year then you might be capable of doing your own taxes. Mostly financial situations change within a year and tax return gets more complicated. In this regard, you might need help. IRS keeps on updating its laws and you may need help to understand them. To know about these changes you need the help of an accountant. These changes are going to help you.
Think Wisely: As you know there is not any fixed income for freelancers. You must update your income and expenditures as they come in. When you keep the record accurate then no need to rush around in panic before meeting your accountant.
Declare All Income: Freelancers should get a 1099-MISC form before Jan 31st from any organization. You are responsible to report all of your income accurately. If you are audited and IRS found the unreported income then you will be held accountable.
Be Prepared For Taxes: If you seek professional advice then you will know how much amount needs to be put aside for taxes. Mostly accountants advise us to put away 30% of total income for tax return. “You probably want to withhold closer to 35% if you have high income and you live in a high-taxed state,” said Corsello.
Know About Deductibles: According to the survey, many freelancers have a hard time paying taxes and 73% don’t deduct any expenses. You can seek the help of a tax professional to identify tax deductions and give you advice on how to lower your bills.
These are the common deductions for freelancers;
- Office space
- Vehicle expenses
- Travel expenses
- Internet expenses
- Office supplies
- Professional services
- Legal advisors
- Business meeting meals
Most freelancers work from home, which is a great advantage to get the home-office deduction. It will save your expenses of the office. You can set a corner as an office and strictly use it for business purposes only. Many taxpayers add bogus expenses which only put them at risk of an audit. Make sure to make a deductible list, it must be ordinary and important to run your business. Don’t expect to get a refund as a freelancer. Of course, everyone loves to get a tax refund. This rule applies to an employer only, whose taxes are automatically deducted from their pay throughout the year. You can get a refund if you overpaid the government. You can receive deductions only under 2 circumstances. First is, when you overly paid quarterly tax payments and 2nd is when you earn so little money throughout the year that makes you get deductibles.
If you look for retirement plans as a freelancer then it’s not their top priority. It is also considered a misconception that retirement plans are too costly. “A retirement plan often provides significant net after-tax benefits. IRS provides simple ways to start saving for retirement as a freelancer.