Freelancing comes with its fair share of unique challenges, but one of the biggest is filing taxes as a freelancer. The good news is that you’re not alone—nearly 53 million Americans, or about 1/3 of the total workforce, are freelancers. Here are six tips to help you file your taxes as a freelancer this year, so you can focus on what matters most—getting paid!
If you’re a freelancer, entrepreneur, or self-employed individual, it’s best to start your taxes early. The earlier you schedule your taxes, the more organized you will be. If you want to be proactive about making sure everything is done in time for tax season, sign up for e-mail reminders from tax prep services like H&R Block to make sure all bases are covered.
2. Know What Kind of Self-Employed Taxpayer You Are
Don’t make the mistake of filing your taxes incorrectly. Many freelancers mistakenly believe that they can incorporate (or form an LLC) and avoid income taxes altogether. To do so, you must meet certain criteria. Specifically, you’ll need to make more than $91,900 as a single taxpayer or $183,000 if you’re married and filing jointly.
If your earnings fall below these thresholds, it may be worth thinking about incorporating them for tax reasons. For instance, sole proprietorships and partnerships tend to face higher self-employment taxes than incorporated businesses do.
To properly file your taxes as a freelancer, it’s a good idea to hire a professional tax preparer or income tax expert. While it’s not cheap, you can save a lot of time and energy by getting an expert involved. While some freelancers prefer to do their taxes—it is pretty straightforward. If your situation is more complicated and you have more than one source of income or very high expenses, it may be best to get help from a pro. In addition, don’t forget about estimated tax payments throughout the year to avoid penalties come April 15.
4. Start Planning Now for Next Year’s Tax Season
It’s never too early to prepare for next year’s tax season. There are some steps you can take now as a freelancer to ensure an easier filing process for the following year. If you’re starting your business from scratch, file an employer identification number application (EIN) with your local IRS office. This is how freelancers are assigned their tax ID number—and it only takes a few minutes.
If you’re expecting to take deductions off your taxes, starting a year in advance gives you plenty of time to do this. Don’t forget to save your receipts, invoices, and all other reports to keep the year’s information as organized as possible.
5. Understand That Your Payment Is Not Income Yet
Understanding what counts as taxable income and what doesn’t is important for all freelancers. While many people assume that each paycheck is income, this isn’t exactly the case. Until you deposit it into your bank account, it is not taxable income. However, because you are required to report all of your business income by law, make sure that you keep close track of how much money is deposited into your account. This way, when tax time comes around next year, you will have an accurate record of what went in and out.
6. Use Free Software like TurboTax
The good news is that it’s not only possible to file your taxes online as a freelancer, it’s free! If you make under $64,000 a year and have a simple tax situation (meaning you don’t officially own a business or have to itemize deductions), then one of these services will let you do your taxes for free. They both require some basic information from last year’s return, but if you’re using them properly they’ll only take about 15 minutes each.
As a freelancer, you’re likely to be on your own when it comes to doing your taxes each year. Even if you have an accountant who prepares them for you, there’s likely more information that you need to know about filing taxes as a freelancer. Use this guide to make sure you’re always fully prepared for tax season.
