If you’re a freelancer or run your own business, you’re fully aware of the many benefits that come with the power to run yourself and your work. However, a significant downside you can face relates to the complications you face when it comes to the dreaded taxation.
The Internal Revenue Service considers freelancers as ‘self-employed,’ so if you’re earning income through projects as a freelance designer, you have to file your taxes as a business owner.
Yes, there are tax deductions that you’re entitled to as an independent contractor or self-employed person, but there are also a few additions that you should be aware of -- and they’re often the bits that first-time freelancers miss when they submit their first tax return and pay taxes.
We’ve put together a summary of the things you should keep in mind when you’re submitting your self-employed tax forms as a freelance designer.
Just beware -- although this article is meant to give you general guidance with your self-employed taxes, we’re not an official financial authority. As such, if you’re having trouble filling in your returns, it’s best to contact a consultant or firm that can offer legal or professional tax advice.
First Thing’s First -- Gather Your Taxable Income
Totalling up your annual income can be quite a fulfilling start to the process! As a freelancer, you’ll likely have streams of revenue coming from different clients and various sources over the course of the recent tax year. That means that you need to compile it all together to give you a total income figure that you’ll use to calculate the basis for your estimated income tax.
You're likely to get numerous 1099-MISC forms, as opposed to a one-off W-2 form from a full-time employer. A 1099-MISC serves the same purpose, outlining the total amount of payments you received from a single person or company during the tax year.
This step can be made much easier by separating your expenses from your business income and expenses. You might want to opt for a business account or use tracking software like Quicken or Quickbooks to help you track revenue and costs in the future.
If you do opt for the business account, just be sure not to put personal funds into your business account and avoid placing business receipts into your personal account.
How Much Tax Do You Actually Owe?
Once you’ve tallied up your income from the previous tax year, it’s time to figure out what you owe and why. Self-employment tax consists of two parts:
- Social Security
If you’re self-employed and earn more than $400 a year, you must pay self-employment taxes on your income. You do this can submitting a personal income tax return, which is a called a 1040 form.
Self-employment tax is 15.3 percent (split as 12.4 percent for Social Security and 2.9 percent for Medicare) on the first $118,500 of your self-employed income. If you’ve had a good year or make more than that on a regular basis, then we’d probably just recommend getting some professional help with your taxation.
How To Maximize Your Tax Deductions
You’ll be glad to hear that, as a freelancer, you’re entitled to claim back tax on things that you wouldn’t typically be allowed to if you were an employee. That said, you should only take tax deductions on what are considered ordinary and necessary for the operation of your business.
But please, try to avoid any attempts to deduct your weekly pizza order…
Typical examples of things you might be able to deduct (legally) include:
- Operating expenses
- Product advertising
- Internet and phone bills
Also, just a further note that sometimes scares people. Don’t worry if your deductions outweigh your profits -- there’s no legal obligation to make a profit every year, and as some of us know, it’s often the case that a new business will run on a loss for the first 12-36 months. You just have to provide intent to the IRS that you are striving to make a profit with your business.
Can You File For Deductions On Courses You Took?
If you’re a keen bean and set aside time to learn as well as work then you’ll be glad to hear that you can deduct tax on classes or courses that directly overlap with your registered profession. The same is true for any licensing, registration or certification costs that are directly associated with your current business.
What you cannot do is deduct tax on something unrelated, for example, as a Content Strategist and Writer, I cannot deduct tax on the ‘101 Gardening Course’ I took last year.
How Much Can You Deduct If You Work From Home?
A high percentage of freelancers will work from home, and for that reason, there are deductions that apply to working from your home. The IRS allows you to write off rent and utilities for the area of your home that you use for your business as an office.
The only catch here is that you must use that space exclusively for self-employment work. Borrowing your kid’s bedroom when they’re at school doesn’t count, and it’s not considered permanent office space.
When Are Your Taxes Due?
April 17, 2018, is the date you need to have highlighted in your calendar this year. If you haven't applied for an extension, you can e-file or postmark your tax returns by midnight on April 18, 2017.
If you need more time, you can also apply for a tax extension by April 17, and you’ll push your tax deadline back until October 15, 2018.
Should You Ask For Help And Pay Someone To File Your Taxes For You?
The first thing to mention here would be that you don’t have even to attempt to do this yourself. It’s purely optional whether you file your tax returns or whether you get some professional help each year. Ultimately, it’s not an easy job, mainly if you’ve never done it before and you’ve managed to get your business into a stable position inside 12 months.
Forms need to be filled out correctly, records need to be regularly maintained, and income/expenses need to be tracked consistently. As your business grows, you might prefer to just focus on doing that solely, and leave the accounting side of things up to the specialists.
As a rule of thumb, costs shouldn’t be too bad, but they will tend to grow proportionally alongside your business income. More income means more tax, which means more accounting expenditure.
All in all, tax season can be daunting, and doing everything from calculating your estimated taxes to submitting the final product can be a big task. The trick? Keep track of every invoice and take your time sifting through everything when February 1 hits. By the time April rolls around, you'll have all your ducks in a row and can just wait for that sweet, sweet tax return.
Have a question about filing US taxes as a freelancer? Ask them below!
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