SOME OF THE ESSENTIALS FREELANCERS NEED TO KNOW BEFORE APRIL 15TH.
Arguably one of the greatest downfalls of the American education system is not teaching its pupils how to properly file taxes. While the IRS has a great and easy-to-read website for teachers to incorporate tax education in their curriculums, most schools across the U.S. neglect to teach these lessons. Just another DIY task for when you hit adulthood. Fortunately, services like TurboTax and FreeFile are out there to streamline the process for those woefully ignorant in this regard. Unfortunately, even these companies aren’t the most easy to use for freelancers, as our tax filing processes are more complex than most. As a freelancer, it’s important that you know the basics when filing as an independent contractor.
In order to understand what forms you need to fill out, you need to understand how YOU are recognized by the Internal Revenue Service (IRS). As a freelancer, the IRS classifies you as “Self-Employed.” According to the IRS, you are self-employed if you:
· “Carry on a trade or business as a sole proprietor or independent contractor.”
· “You are a member of a partnership that carries on a trade or business.”
· “You are otherwise in business for yourself (including a part-time business).”
Like everyone else, you’re required to file a return on April 15th of every year. As a self-employed individual, you’ll likely be required to pay self-employment tax, which is Medicare and social security combined. Depending on how much you make, you’ll also be required to pay an income tax. Finding out how much you pay in income and self-employment tax can be figured out here.
FORMS AND FILES
As a freelancer, there a few forms you need to fill out for tax purposes, as well as files to keep track of throughout the year.
Form 1099- MISC: Anyone that pays you more than $600 in a calendar year is required to send you a 1099. Any clientele you service will fill one of these out to reflect the money they paid you for a particular period of time. They will give a copy to you and to the IRS.
Form 1040 - ES: This is your standard tax form that’s used to calculate and pay your estimated tax. This is what you will file with the IRS to pay income tax, self-employment tax, and other taxes that you’re responsible for.
Deducting money from your taxable income is one of the greatest perks of being a freelancer. Technically, you are self-employed, which means you own your own business, which means you can classify certain expenses as “for that business.” Things like lunch with a client, flights to a conference, or a new laptop. Classifying these as business expenses means that you don’t have to pay taxes for them. When filing your taxes you can write these expenses off and the IRS will repay the money you spent in taxes on those items. Reducing your overall taxable income through write offs is actually a double boon, because the lower your income is the less it is taxed. So not only can you get taxes back through deduction, you can potentially lower the overall amount you’re taxed at all. Freelancers have a hell of a lot of control over their finances which can be scary, but if used to your advantage, can save you some real change. The more you can lower your AGI (Annual Gross Income), the better. While there are quite a few deductions that you can write off, these are some of the ones we definitely recommend you consider:
Health insurance premiums: Since you’re self-employed, you’re most likely paying for your own health insurance. With the rising costs of healthcare in the United States, writing this expense off in your tax return is important towards saving money. Keep in mind, however, that this exemption is only recognized on a month-to-month basis, meaning that whatever months you weren’t covered underneath some kind of employer-subsidized health insurance, you get to write those off. Note that for long-term health care premiums, you can only deduct $430 if you’re under the age of 40. Regardless, save money here where you can.
Important software and hardware: The Adobe Suite is not a chump-change bill every month. Nor is that expensive $2,000+ MacBook pro you just purchased. Therefore, write them off! As long as they pertain to the business that you’re doing, you shouldn’t have trouble adding these to your list of itemized expenses.
Travel: Whether it be by plane, train or automobile, if traveling is part of your freelance career, write it off! Save your tickets, receipts, and other information pertaining to business-related travel. If you drive a lot, you can also deduct your mileage for gas expenses. Be sure to keep track of where you started, where you ended, and how far you traveled. The mileage rate for business travel in automobiles in 2021 is 56 cents per mile.
While it is imperative to understand all this information know that tax law is immense and frequently confounding. You will never understand every rule, or statute, or loophole. Even though you should educate yourself on this matter, we highly recommend getting professional help once a year when tax day rolls around. With the amount of money you’ll save, you can afford it.