By Brittany Archer
The flexibility that comes with being a freelancer is endless. Work from home, or work from anywhere in the world. The IRS considers freelancers to be self-employed, which means that you must file your taxes as a business owner. If you are looking for more ideas about how to make money as a freelancer, read 5 Ways to Make Money Online.
In a traditional work setting, you receive a W-2 from your employer for tax reporting purposes. As a freelancer, your first job come tax season is to gather all of your income sources from the year into one place. You have likely received one or various 1099-NEC forms (formerly 1099-MISC) from each individual or organization that paid you over the year. You might be wondering how much do you have to make to file taxes. The IRS requires individuals and companies to provide their contractors and freelancers with a 1099 after the amount exceeds $600.
- In addition to the standard income tax, freelancers are also responsible for paying the self employment tax of 15.3% in 2021. If you were a regular employee, Social Security and Medicare taxes are automatically deducted from each paycheck, and your employer covers half that amount. As a freelancer, the self employment tax reflects both the employer and employee responsibility to Social Security and Medicare.
- Experts recommend that each time you collect a check from freelance work, you set aside 20-30% of that income for tax season.
Detailed bookkeeping can save you large amounts of time, and not to mention save you money. By keeping accurate records of your expenses throughout the year, you can rest assured that you can have the best chance at maximizing your deductions when it comes time to file your taxes. My personal favorite software for bookkeeping is Quickbooks, which also allows you to download an app that can help automate the process of itemizing your expenses. Quickbooks can also sync with TurboTax, a software that can be used to file your own tax returns.
If you have a lot of expenses over the year, hiring a bookkeeper on a monthly or quarterly basis is a great way to stay organized and keep up with your receipts so that come tax season, you have clean organized books to hand off to your tax preparation professional.
Taxable Deductions lower your taxable income, which can provide you the opportunity to potentially reduce the amount of money you owe to the IRS. As a freelancer you are offered many different opportunities to save money that are not offered to a W-2 employee.
The IRS states that in order to qualify for reducing your taxable income, expenses must be considered ordinary and necessary to the operation of your business.
Typical Deduction Categories:
Required Equipment and Materials
- An example could be a laptop or printer that you needed to buy specifically for your business. This would typically be considered eligible as a deduction.
Home Office Deduction
- Must be used exclusively for self employment work
Travel and Meals
- Traveling to a job (with exceptions around commuting to an office) is considered a taxable deduction.
- Business meals with clients are deductible at a 50% rate
Education and Certification
- Educations and certifications directly related to your business may be considered a taxable deduction.
Last but not least, best practices are keeping your personal and business receipts and expenses separate, and understanding the difference between the two. A separate business checking account is the best way to move forward with organization and to avoid confusion and penalties from the IRS.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice.