Freelancing has its many benefits – you are your own boss, make your own schedule, work with clients you are passionate about, and have the option of working from anywhere. Compared to traditional corporate jobs, freelancing is great, but has one common annoyance: taxes. Due to the novel Coronavirus, the tax deadline has shifted from April 15th to July 15th. Meaning it is not too late to get organized and file on time.
Being in charge of your own taxes can be hard. For example, when you work for yourself, no one is taking your taxes out of your paycheck, making you responsible for self-employment tax. To make things easier on you, we solved some of the most urgent questions. So stop dreading your taxes, and take this social-distancing time to learn how to file.
Verify that you are a freelancer.
Freelancer is another term for self-employed. If you have no long term commitment to a specific employer or client, you are a freelancer. The tax code will list you as “self-employed” or “independent contractor”.
Don’t mix business with pleasure!
Once you’ve established you are a freelancer, keep things very separate. Don’t put personal funds into your business account. And when you purchase something for the business, be sure to get a receipt for reporting purposes.
Get specific, create memos of what everything was for. If you bought office supplies make sure you note “payment for office supplies” on the check or receipt. A $50 check or receipt to (insert name) from your business account might be a gift, loan, or personal expense.
Figure out your EIN number.
Assigned by the IRS, an EIN number is used to identify a business entity. The EIN number helps separate your business from your personal account and is used to set up your business checking account.
What’s a 1099?
If you are permanently employed by a company, you should receive a W-2. If you are self-employed, you’ll receive a 1099. The 1099 is a form stating how much money you’ve been paid in that taxable year. Both forms are usually mailed out or emailed in January or February. Be sure to keep track of these forms to prove accuracy of the amounts.
Don’t forget the self-employment tax.
If you’re familiar with a W-2, you know it reports deductions for federal income taxes, state income taxes, and social security taxes. However, a 1099 does no such thing. A 1099 form usually shows a much higher payout amount than a W-2. But don’t get too excited, you’ll need to pay all the deductions first, in order to get your payment. Self-employment tax is social security and medicare taxes for individuals who work for themselves. If you earn more than $400 a year, you are obligated to pay self-employment taxes on your income. Unfortunately the tax is quite steep, at 15.3% – 12.4% is taken out for social security and 2.9% for medicare taxes. If this is too high for you, consider raising your rates for the next taxable year.
Deductions, deductions, deductions!
Now for some good news. As a self-employed professional, you can deduct business expenses like any other business. Operating expenses, travel, computers, printers, supplies, internet and phone bills, are all fair game here. If you’re a writer, you can write off your computer. If you’re an artist, you can write off any painting materials. The IRS allows this because they assume you have the intent to make a profit and deem them as essential tools in doing so.
You can also deduct educational expenses for taking courses that directly support your business. As long as your education maintains or improves your job skills (aka it can’t qualify you for a new trade or business), you can take all the courses you want on websites like Skillcrush or Masterclass.