Freelance work has replaced full-time staff positions for many people during the rise of the gig economy. We’ll likely see a more robust startup culture in the future, making hiring staff, task organization, employee management, and payroll compliances new territory for many.
Those that are new to freelancing should expect a different kind of tax burden that uses an entirely separate fillable 1099-NEC document. But, knowing which document to use when filing your taxes isn’t everything; you also need to follow these essential tax tips for freelancers.
Tip #1: Keep Good Records
Most independent contractors don’t keep a record of their freelancing gigs, making it impossible for them to prove their case once audited. Invest in a scanner for paper documents and keep a hard digital copy of everything you send to the IRS and your clients for up to three years.
Tip #2: Use Financial Software
Bookkeeping is often considered boring for creative freelancers, but it’s necessary for you to learn how to calculate your expenses from your assets. Alternatively, you could buy financial software. As long as you keep up with your invoices, you’ll always know what you owe.
Tip #3: Hire an Accountant
If you hate bookkeeping with a burning passion and prefer to leave the number crunching to someone else, hire an accountant. Financial software won’t be held legally liable if you input the wrong information, but accounts will be as long as you hand over all required documents.
Tip #4: Know Your General Tax Burden
Freelancers have a higher tax rate than employees. An employee’s income tax is typically 7.65%, whereas self-employment tax sits around 15.3%. Additionally, the first $142,800 of your earnings are subject to the SSN portion, and you may pay an additional 0.9% for Medicare.
Tip #5: Travel and Business Deductions
One way freelancers can reduce their high tax burden is with deductions. There are hundreds of tax write-offs available to contractors, but business-related food and travel are some of the most common. Travel and business deductions may also include airplane tickets and hotel lodging.
Tip #6: Home Office Deductions
All freelancers who work from home will allow you to write off everything from rent to utilities for portions of their home that they use as an office. However, there is a catch: the room you’re writing off can only be used as a home office. You can’t borrow space during work hours.
Tip #7: Health Insurance Premiums
Independent contractors can deduct all their health insurance premiums without itemizing them. Health insurance premiums count as an above-the-line adjustment, which reduces your entire adjusted gross income. You can even deduct your dependents’ and spouse’s health premiums.
Tip #8: Pay Estimated Taxes
The IRS expects freelancers to pay estimated taxes, which is what you expect to pay in taxes at the end of the year. If you make more than $400 a year, you need to provide tax payments quarterly. You’ll need to make quarterly payments by the IRS’s due date to avoid penalties.
Tip #9: Open a Retirement Fund
Freelancers don’t have an employer that sets up a retirement fund for them, meaning they’ll have to square money away in a savings account or open one themselves. If you do open an IRA, you can deduct 25% of your net earnings from your own taxes directly into it.
Tip #10: Hire Your Family Members
If your spouse is in a lower tax bracket than you, hire them as an employee. You can reduce your overall tax burden as long as your spouse claims that amount on their taxes. To save even more, hire your children as they’re exempt from Social Security and Federal Unemployment.
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