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Freelancers and Taxes: What to Know Before Tax Season Hits

Tax season can be daunting for anyone, but freelancers can find it especially challenging. Unlike traditional employees who have taxes withheld from their paychecks, freelancers need to navigate a more complex landscape of handling deductions, quarterly payments and specific tax forms. Understanding the essentials before tax season can make filing your taxes much smoother and potentially help you save on your tax bill.

Here’s what to know before tax season hits.

1. Know your tax obligations as a freelancer

Freelancers, or independent contractors, are generally classified as self-employed. This classification means that freelancers are responsible for both income tax and self-employment tax. Self-employment tax includes Social Security and Medicare taxes, which would typically be partially covered by an employer. As a freelancer, you’re responsible for paying both the employer and employee portions of these taxes, which currently stands at a combined rate of 15.3%.

Freelancers also need to track their income carefully. The IRS expects you to report all income, even if it’s from various sources or small amounts. Keeping meticulous records can protect you in case of an audit and help you avoid underreporting.

2. Understand your quarterly estimated taxes

Most freelancers need to make estimated tax payments every quarter. These payments help cover income tax and self-employment tax, and they are generally due on April 15, June 15, September 15, and January 15 of the following year. If you don’t make these payments on time, or you underpay, you may face penalties.

To calculate how much you should pay each quarter, you can estimate your expected income or use your tax bill from the previous year as a guideline. Many freelancers use the “safe harbor” rule, which requires paying either 100% of last year’s taxes or 90% of what they owe for the current year, whichever is less, to avoid underpayment penalties. Working with an accountant can simplify this process and help you make more accurate payments so you can stay on top of your obligations.

3. Organize and track deductible expenses

One of the perks of freelancing is that you can deduct various business expenses, reducing your taxable income. Here are some common deductible expenses:

  • The home office deduction. If you use a portion of your home exclusively for business, you may qualify for a home office deduction. You can choose between the simplified option (deducting $5 per square foot up to 300 square feet) or the regular method, which involves calculating actual expenses like rent, utilities and repairs.

  • Equipment and supplies. Laptops, software, office supplies and even furniture used for business purposes can be written off as business expenses.

  • Internet and phone service. If you use your internet or phone for work, a portion of these bills may be deductible. Be sure to keep records that show the percentage of business use.

  • Travel and meals. Business travel expenses, like flights, lodging and meals are tax-deductible. If you’re entertaining clients, you can also deduct 50% of the meal expenses.
    Educational expenses. Courses, books or certifications that improve your skills for your current line of work can also be deductible.

Remember: Careful record-keeping is key. Many freelancers use apps to scan receipts or link their business accounts to accounting software to automatically track expenses. It’s also beneficial to have a dedicated business account to keep personal and business finances separate.

4. Know which tax forms you’ll need

Most freelancers receive a Form 1099-NEC from each client who paid them over $600 during the tax year. However, even if a client doesn’t issue a 1099, you’re still required to report that income.

Along with 1099-NECs, freelancers typically file a Schedule C (Profit or Loss from Business) with their tax return, listing their income and deductible expenses. Additionally, you’ll need to file a Schedule SE to calculate your self-employment tax. If you’re making quarterly estimated payments, you’ll also need to fill out Form 1040-ES.

In some cases, freelancers set up business structures like LLCs, which may involve additional forms and tax considerations. Consulting with a tax advisor can help you understand which structure best suits your needs and the tax implications involved.

5. Understand tax credits and savings opportunities

Freelancers can also qualify for certain tax credits, which directly reduce the amount of taxes owed. Here are a few credits that may be available to you:

  • Saver’s Credit. If you contribute to an IRA, you may qualify for a Saver’s Credit, designed to encourage retirement savings.

  • Health insurance premium deduction. If you pay for your own health insurance and aren’t eligible for employer-subsidized coverage, you may be able to deduct these premiums, which is especially helpful for freelancers.

Additionally, freelancers may consider retirement plans like a SEP IRA or Solo 401(k), which offer tax-deferred savings options. These contributions can reduce your taxable income for the current year while helping you save for the future.

6. Consider professional help

Though you may be able to manage your taxes on their own, hiring an accountant can save you time, stress and money. A tax professional can help you identify deductible expenses you may not have considered or known about, ensure you’re filing accurately and help with complex issues, like quarterly taxes or retirement planning.

Tax advisors can also help with long-term planning, suggesting ways to structure your freelance business to maximize tax efficiency. For instance, if your freelance business grows significantly, your accountant might recommend setting up an LLC or S-corporation to minimize self-employment tax.

7. Start early and stay organized

Avoid the rush by organizing your records throughout the year. This includes tracking income, storing receipts and categorizing expenses well in advance of tax season. Starting early reduces the stress of last-minute scrambling and helps you catch any missing information, such as 1099s from clients.

Preparing for tax season as a freelancer involves understanding your obligations, tracking your income and expenses and maximizing deductions and credits. With careful planning, you can navigate tax season with confidence and keep more of your hard-earned income.

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