It is quite different for freelancers and the self-employed regarding tax filing and self-tax.
For Freelancers, it is up to them to calculate, report, and pay taxes rather than W-2 employees. Proper tax planning can save you monetary penalties and optimize your tax deductions.
When it comes to tax planning, it is important to budget to comply with IRS regulations There are many forms of tax planning, and I will speak about some focused specifically on freelancers.
Understanding Self-Employment Tax
For self-employed individuals, it is necessary to pay Social Security and Medicare taxes which cover self-employment tax. You are taxed as both a business owner and an employee. Currently, the rate is 15.3%. This is made up of:
- 12.4% for Social Security
- 2.9% for Medicare
If your net earnings exceed $200,000 (or $250,000 for married couples filing jointly), you may have to pay an additional 0.9% tax on Medicare as well. It is important to keep track of your business expenses, as these taxes apply to your net earnings. By tracking expenses, you can minimize your taxable income.
How to Calculate Self-Employed Tax: Your self-employment tax can be calculated using the Schedule SE. You can deduct half your self-employment tax from the total self-employed tax on your IRS Form 1040.
Quarterly Estimated Tax Payments
Hiring of freelancers has become popular due to the operational flexibility it accords them; however, it is critical to understand tax payments. Individuals must remit estimated tax payments four times a year, as there is no withholding from the income:
- First Installment: 15th April
- Second Installment: 15th June
- Third Installment: 15th September
- Fourth Installment: 15th January (of the upcoming year)
To estimate taxes, annual income needs to be calculated along with deductions, and IRS form 1040-ES needs to be filled. Equal payments made quarterly also help to avoid underpayment penalties.
Paying Insufficient Taxes: A Penalty
The IRS can file penalties if you do not remit enough estimated taxes. The IRS has a minimum remittance requirement of 90% of total tax liability for every year, or 100% of last year’s tax liability, depending on whichever is lower.
Reporting Income and Filing Taxes
Freelancers are required to attach Income Schedule C (Profit and Loss from Business) to Form 1040 for submissions. If net income exceeds $400, it is mandatory to submit Schedule SE.
Most Common Forms:
1099-NEC: To be submitted by clients paying above $600 in the tax year.
1099-K: To be issued with payment platforms like Paypal or Stripe where transactions exceed $20000 with 200 transactions.
Form 1040: The universal tax return form.
Schedule C: Business income and expenses declaration.
Schedule SE: Submission for self-employment tax.
Maximizing Tax Deductions
Freelancers can claim so many expenses as deductions, which effectively lowers their taxable income. The following are some Expenses that can be claimed:
Home Office Deduction: If you have a place set aside exclusively for work.
Internet and Phone: Business-related portions are deductible.
Software and Tools: Apps like Zoom, or Adobe and accounting packages.
Professional Services: Cost of accountants or any paid consultants and lawyers.
Education and Training: Certifications and online courses.
Health Insurance Premiums: Not sponsored by an employer but are self-employed.
Travel Expenses: Trips undertaken for business which includes airfare, lodging, and meals.
Advertising and Marketing: Social media advertising, website SEO, and hosting services.
Office Supplies and Equipment: Business-related purchases of laptops, printers, desks, and office chairs.
Keeping Accurate Records
‘Freelancer’ is a new form of employment and as such has come with a new way of record keeping. Income and expenses must be recorded in an orderly manner. Use bookkeeping software such as ‘EasyBooks’, ‘Wave’, or ‘FreshBooks’ to record all payments and receipts. This is very useful during filing taxes or when being audited by the IRS.
Best Approaches to Record Keeping:
- Be sure to make both physical and digital copies of receipts, invoices, and bank statements.
- Use cloud-based accounting software so that information is easily retrievable and backed up.
- An identifiable business bank account helps separate personal and business finances.
- If you are using a vehicle for business purposes, maintain your mileage logs.
Hiring a Tax Professional
In cases where tax returns are complicated, it is a good idea to hire tax professionals such as CPAs. They can assist in:
- Maximize reporting deductions
- Ensure compliance
- Ensure that the returns are accurately prepared and filed
Provide advice on matters regarding reducing taxes, such as incorporating businesses and the difference between LLCs and S-corps business structures.
Local Taxes And State Tax
It is important to confirm with the appropriate local jurisdiction regarding any local and state taxes in addition to the federal taxes. There are cases where other states may require estimated additional tax payments or the registration for sales tax when there are goods sold.
Considering Those Factors:
Sales Tax Compliance: You might be obliged to collect and remit sales taxes if your business sells, or offers goods and digital services.
Other State Limitations: Tax self-employment laws differ from one state to another; hence, you should consult your state tax authority.
Urban Business Licenses: A working freelance business can be subject to business licensing requirements in some counties and cities.
Common Tax Mistakes to Avoid
As a freelancer, there are several mistakes you can make that can lead to your company paying more taxes than it should or even incurring penalties. Always avoid the following:
Not Making Quarterly Payments: This might lead to hefty penalty fees accompanied by an interest.
Not Tracking Expenses: If expenses in the business are not recorded, the business taxes will have to go up because there will be no deductions availed.
Mixing Personal and Business Finances: This could make filing taxes more difficult and may cause an audit.
Income Underreporting: The IRS is provided with 1099 forms and in the event there are discrepancies, they will raise a flag.
Forgetting to Deduct Health Insurance: For many self-employed individuals, their health insurance may be deductible.
Missing Financial Documents: Bad documentation can lead to problems in the audit.
How EasyFiling Helps Freelancers and Self-Employed
It may be challenging for a self-employed person or freelancer to file taxes because of how convoluted it is but with EasyFiling, the process becomes easier. We allow self-filed tax returns the comfort of filing without the stress of complying with laws or missing deductions.
Here are a few of the ways we assist with this:
Automated Tax Calculations: Quarterly tax bills don’t come as a surprise to you because our system films them automatically, which lowers the chance that you will be slapped with a penalty.
Filling For 1099 And Schedule C: Tax forms do not need to be a headache. We make sure your money and expenses are correctly documented with the IRS.
Taxes Optimization: Taxes can be more manageable with EasyFiling. Reduced taxes mean less stress.
Bookkeeping Services: Effortlessly streamline your income and expenditure with our bookkeeping services.
Expert Tax Assistance: Reach out with any questions and let our professionals guide you through tax forms.
Making use of EasyFiling allows freelancers or self-employed individuals to painlessly comply with the IRS since our goal is to help maximize the million different ways they can save on taxes.
Conclusion
Careful planning and good record-keeping are necessary while filing tax returns for a freelance business. Organizing records, maximizing deductions, and paying taxes quarterly will allow you to achieve compliance and nullify most of your tax obligations. When in doubt, it is always best to reach out to a tax expert so you don’t fall short on any IRS obligations.
Self-employed workers as well as freelancers can shift their focus on growing their businesses whilst maintaining a good EasyFiling record to balance their tax returns, avoid penalties, and improve their self-employment workload. Remember to take a proactive approach so your business is financially viable every year.
Nabin Adhikari
