How To File Your Taxes If You’re A Freelancer
If you freelance — either as your primary job or your side hustle — the way you file your taxes will be different than someone who works a salaried position and gets a W-2. And, the more jobs and 1099s you have, the more confusing the process may become. So if you wonder how to file taxes as a freelancer, that’s a great question.
According to TurboTax, aside from regular income tax, freelancers must pay self-employment tax, too — 15.3 percent — which represents Social Security and Medicare taxes that non-freelancers automatically have taken out of their paychecks.
“Almost any earned income you made — even if you were paid in cash and even if it was from part-time work or a side gig — is taxable,” Josh Zimmelman, owner of Westwood Tax & Consulting, tells Bustle. “The way you report your income varies based on whether it was earned as an employee or an independent contractor, but it still is all taxable — the IRS doesn’t care how you make your money, but they do want their cut.” He also says to keep in mind that just because you do not receive a 1099 for freelance income, you still need to report that income.
Below, tax experts weigh in on how to file taxes as a freelancer so you can avoid common mistakes.
1. Gather Together All Sources Of Income
Lisa Greene-Lewis, TurboTax Expert and CPA, tells Bustle that the first step for filing as a freelancer is to gather and report all sources of income, such as your numerous 1099 forms.
“You may not necessarily receive the tax forms to report all of your income — 1099-MISC will only be issued if your client is paying you $600 or more for your freelance or contract work, and you will only receive a 1099-K form if you accept payment through a third party provider, have more than 200 transactions, and make more $20,000.” So, she says to keep careful track of other income you made that may be under these limits since you must still report it all.
It’s also best to have a separate business bank account, Mike Savage, CPA and CEO of 1-800Accountant, tells Bustle. “Having a business bank account is essential,” he says. “Have all business expenses flow through those business accounts for easier tracking of business income and expenses.”
2. Find Your Backup Documentation
Whether you have all your 2018 receipts and backup documentation in envelopes or use a resource like QuickBooks Self-Employed (QBSE), it’s important to have it readily available for when you file your taxes. “Your accountant would likely prefer that you go with a tool like QuickBooks Self-Employed, as it can easily help you manage your finances, estimate quarterly taxes, sort business from personal expenses, track deductions, and more throughout the entire year,” the QBSE team says.
3. Make Sure To Take Tax Deductions
One way to help reduce the amount of money you owe the IRS is by taking tax deductions — writing off certain business-related expenses, such as office ones. Of course, it’s best to consult the IRS website or a tax professional if you have any doubts about what can be written off — or not.
“For an expense to be deductible, it has to be ‘ordinary’ and ‘necessary,’” Gail Rosen, CPA, who has been providing tax services for freelancers for over 35 years, tells Bustle. “Every deduction saves you a lot of money — make sure you do not miss any of these expenses.”
Additionally, if you’re self-employed, Greene-Lewis says you can take deductions on other things, such as a home office deduction (from rent to office utilities), classes you take in your field, equipment (i.e., a computer), meals (50 percent deductible), and travel, including gas to and from meetings.
Furthermore, there’s a new deduction freelancers can take this year. “There’s a big new tax deduction for people who are self-employed: It’s a 20% deduction on pass-through income,” Andrea Coombes, tax specialist for NerdWallet, tells Bustle. “Often, if you’re a freelancer, working for yourself, you’ll have pass-through income.” However, she says that this new deduction is complicated. “Definitely make sure you’re following the rules before you claim it,” Coombes says.
4. Figure Out If You Should File Your Taxes Quarterly Versus Annually
Savage recommends reviewing your financial statements throughout the year, especially your balance sheet and income statement. “If you have a net profit, you should make estimated tax payments each quarter so you don’t have a huge tax burden when you file your tax returns,” he says. He says a bookkeeping platform that syncs the business accounts automatically and categorizes those transactions, either on a monthly or quarterly basis, can help.
5. Take A Health Insurance Deduction
Emil Abedian, founder and CEO of Anchor Bookkeeping, and partner of Glendale, CA-based CPA firm Abedian + Totlian, tells Bustle that many freelancers do not fully take advantage of the health insurance deduction. “As a freelancer and business owner, you can deduct your family’s health insurance premium against your business income,” he says. “This deduction could potentially save small business owners and freelancers thousands of dollars in taxes, especially now with the health insurance premiums increasing each year.”
6. Don’t Forget To Save For Retirement
Zimmelman says freelancers often think they don’t have access to retirement savings the same way employees would, but that they do have options. “A Simplified Employee Pension Plan (SEP IRA) is for self-employed individuals and small business owners,” he says. With a SEP IRA, you have tax-deferred savings for retirement which are tax-deductible. Contributing to it will increase your deductions, which will lower your taxable income.
Zimmelman also says that a Savings Incentive Match Plan for Employees, SIMPLE IRA, is a type of retirement plan for small companies with fewer than 100 employees who don’t have another retirement plan. “There is also a self-employed 401(k) option for self-employed individuals or businesses with no employees (other than yourself and your spouse),” he says. So, you can see which retirement plan works best for you.
7. Talk To A Tax Expert
Even if you do your taxes yourself and/or use tax software to help you out, it never hurts to get a professional’s advice, too. “Do have a conversation with a tax pro,” Krystal Pino, CPA and founder of the accounting firm Nomad Tax, tells Bustle. “Even a short conversation can help you immensely.” Plus, some tax firms and accountants have reduced pricing at times — or may even help you out pro bono.
While filing taxes as a freelancer can be intimidating, it certainly doesn’t have to be — especially when you take into account the experts’ tips above and utilize all the resources you have.