In most respects, it’s hard to argue with the life of a freelancer: you get to determine your own schedule, you report to no one but yourself, and more often than not, you’re able to work from the comfort of your own home (or at least the local coffee shop).
When it comes to taxes, though, freelancers have to fend for themselves–with no W-2 to tell you how much you made in a given year and no employer to automatically deduct from your income, you have to pay very careful attention to how much you owe the IRS and when to pay it. Because they’re technically self-employed, freelancers are required to pay both the employer’s and the employee’s shares of social security and Medicare taxes, coming out to a not-so-trivial 15.3% of their income. Whether you’re working a hodgepodge of side gigs or offering one specific service to a wide array of clients, here’s our quick guide to taxes for freelancers:
Keep Track of Income
Throughout the year, it’s critical that you keep thorough documentation of everything you’ve made. This way, you won’t have to deal with a headache come tax season, and you’ll have all the evidence you need if you’re ever audited by the IRS. Clients who pay you more than $600 over the course of the year are required to file a 1099-MISC, which will help to keep clear track of all payments from your major clients. It’s your responsibility, though, to tabulate any income made from clients who pay less than $600.
Hold Onto Your Receipts
Paying taxes as a freelancer is tough, but deductions offer something of a silver lining. Since you’re self-employed, you can count any work-related expense, like essential computer supplies or meals bought on the job, as a deduction. You’ll have a much easier time adding up those deductions if you keep a specific folder (be it digital or physical) where you hold onto the year’s receipts from work-related expenses.
Know What to Deduct
Technically, everything you deduct needs to be demonstrably necessary for your work: a freelance photographer will have no problem deducting a new camera purchase, but the same deduction might be tough to justify for a freelance construction worker. Meals, plane tickets and gas bought to get to a worksite can all be deducted if they’re clearly work-related. Best of all, if you have a home office, you can deduct that too. Check out this guide if you’re looking for more advice on tax deductions.
Pay on a Quarterly Basis
Because freelancers are technically their own boss, they’re required to pay some of their taxes on a quarterly basis, just like any normal employer. You should come up with a rough estimate of what you’ll make over the course of the year (it’s okay if it’s not perfectly accurate), and sign up to pay self-employment taxes in order to avoid any unexpected penalties come tax season. We recommend you sign up to have your taxes automatically withdrawn by signing up for the IRS’s Electronic Federal Tax Payment System–that way, you’ll know you’re paying on time.
Work With an Accountant
Finding professional help to sort through your taxes might cost a little bit now, but in the long-term, it will probably help you save hundreds, if not thousands, of dollars. An accountant will help you maximize your deductions, pay on time, and avoid any penalties from the IRS. If you don’t want to work with an accountant, though, you can still save a quick buck by using the Free File services offered by the IRS.
The Bottom Line
Taxes can be a headache for freelancers, but with the proper vigilance and documentation, they don’t have to be. Try setting aside between 25-30% of your income so that you’ll have more than enough saved up once your quarterly payments are due. And if you’re looking for more advice, we recommend you check out The Freelancer’s Union’s comprehensive guide on taxes for freelancers.