A Freelancer’s Guide to Taxes
Taxes can be stressful and burdensome for every freelancer. This will help relieve some of the pain.
As you are considered self-employed as a freelancer you get the advantage of tax deductions but also the disadvantage of keeping track of these expenses — proving to the IRS that each deduction is accurate and appropriate.
How much to set aside
Each freelance check you receive should set aside 25% to 30% for taxes — which should be put in a separate savings account to use when it’s time to pay Uncle Sam. There are a few reasons why the range to set aside is so high, mainly because of the self-employment tax. As an employee, Medicare and Social Security are taken out of your paychecks automatically with the employer paying one-half of 15.3%. Unfortunately, as a self-employed individual, you are expected to pay the entire 15.3%.
What forms to use
If you do not receive a 1099-MISC — a form that companies use to report payments to nonemployees — and received more than $400, you probably were paid through PayPal or another online payment system. If you don’t receive a tax report, understand that you aren’t off the hook come tax time.
You should also receive a 1099-K if you were paid more than $20,000 or more than 200 times, however, if you don’t qualify for a 1099-K, you can use the Schedule C tax form — which serves as an overall tax report for your income and expenses. Schedule C summarizes your 1099 forms into one form, which deducts your expenses from your income. If you had $5,000 or less in expenses, the Schedule C-EZ may be best for you to choose from.
Deductions and expenses freelancers can use
Here are some expenses to consider that every freelancer should pay attention to as each tax deduction can save you a bundle of cash during the beloved tax season.
Equipment and supplies
This is one that raises eyebrows. Your equipment and supplies that are purchased to keep your freelance business going are deductible. Keep your personal and business expenses separate by opening a separate bank account just for your freelance purchases and expenses to prove accountability — especially for high-value items.
Education and certifications
If you are taking classes to improve your craft, you can deduct the cost of those educational fees on your taxes — ensuring you can prove that the course benefits you and your business. This holds true for licensing, registrations, and certifications. These do not include courses that are outside of your medium — such as a programmer taking an art class. The IRS doesn’t have leeway on these types of things.
Meals and travel
Be careful with this one as it is the most abused tax deduction for business owners. You can deduct 50% of your costs assuming you are traveling or eating for work — which does not include your daily commute to the office or grocery store. On each receipt, make a note of who was at the meal or where you were traveling — and tie it to a specific job in case you are asked to provide proof. Don’t write off vacations as business expenses and title them as “Research and Development.”
This is a great deduction that all freelancers should use. If you work from home in a dedicated space for work such as a room or office, you can deduct the cost of that room in addition to a portion of utilities. The square footage of that room in comparison to the entire home is the deductible amount, and the room must be specifically dedicated to your work 100% of the time.
Understand that as a freelancer, you can take more deductions that an employee, however, these deductions must be ordinary and necessary to your freelance operations. Don’t abuse the deductions as any abuse to the tax code can land you in rough waters with the IRS.
By maximizing the tax code for your freelance business, you generate more profit for the year by being methodical and organized. It’s difficult to see yourself as a business, however, the IRS classifies you as self-employed operating as a freelancer. Take advantage of that fact.