Freelancers and Taxes: What to Know Before Tax Season Hits

If you’re like many others who have embraced the world of freelance work, there’s a whole new world of taxes waiting for you. You’ll need to understand your tax obligations, pay estimated taxes quarterly, deduct your business expenses, learn which forms to file and much more. It’s a good idea to hire a tax professional to help you, at least until you are fully fluent, and start early so you don’t find yourself buried under paperwork and way behind. It may seem intimidating, but didn’t filing regular income taxes seem that way at first? You can do this! Here’s what to know before tax season hits if you’re a freelancer.

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 covered partially 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 well. The IRS expects you to report all income, even if it’s from various sources or small amounts.

2. Understand your quarterly estimated taxes.

Most freelancers need to make estimated tax payments quarterly. They help cover income tax and self-employment tax. 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.

3. Organize and track deductible expenses.

One of the perks of freelancing is that you can deduct various business expenses, which reduces 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.
• 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.
• 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 deductibl

4. Know which tax forms you’ll need.

Most freelancers get a 1099-NEC from each client who paid them $600+ during the tax year. But, 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 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.

5. Understand tax credits and savings opportunities.

Freelancers can qualify for certain tax credits, which directly reduces the taxes owed. For example, if you contribute to an IRA, you may qualify for a Saver’s Credit, designed to encourage retirement savings. Also, if you pay for your own health insurance and aren’t eligible for employer-subsidized coverage, you may be able to deduct these premiums.

Additionally, freelancers may consider retirement plans like a SEP IRA or Solo 401(k), which offer tax-deferred savings options.

6. Consider professional help.

Though you might manage your taxes yourself, hiring an accountant can save you time, stress and money. A tax professional can help you identify deductible expenses you may not have considered, ensuring you’re filing accurately.

7. Start early and stay organized.

Avoid the rush and stress by organizing your records throughout the year. This includes tracking income, storing receipts and categorizing expenses well in advance of tax season.

Paying taxes as a freelancer can be challenging, but with the right information and preparation you can navigate tax season successfully.