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tax tips for freelance workers

7 Tax Tips for Freelance Workers

Freelance workers certainly don’t have it easy.

Many take on multiple jobs at once. They’re responsible for their own health care and retirement plans. And they have to deal with the taxes.

Yes, just about every type of worker has to pay taxes. But traditional full-time gigs at least take care of some of the clerical work behind it. Taxes for freelancers and independent contractors aren’t just different – they’re more complicated, more work-intensive and come up more often throughout the year than they do for traditional workers.

We’ll help you stay ahead with these tax tips for freelance workers:

7 Tax Tips for Freelance Workers

Know Your Tax Forms

At the onset, you need to fill out a separate W-9 for each company or person you work with. After that, company/person that has paid you more than $600 in a year will need to send you a 1099-Misc. If you only have one, maybe two freelance jobs, that’s no big deal. But if your line of work requires you to juggle several throughout the year, we suggest creating a checklist so you can keep track of all the various 1099s you’ll need to send in when you file. Companies and individuals are supposed to send you 1099s by early February, so you’ll need to start tracking down any forms you haven’t received by then.

Know Which Taxes You Need to Pay

Freelance workers need to pay regular income tax, but they also are responsible for self-employment taxes. Self-employment taxes, which go toward Social Security and Medicare, are 15.3% in 2021. Also importantly, freelancers typically don’t pay annually – instead, those who expect they’ll owe at least $1,000 in a year are responsible for paying estimated taxes on a quarterly basis. The worksheet in Form 1040-ES can help you determine what your estimated tax payments will be.

Save, Save, Save

Because you’re not only responsible for taking care of your own taxes (rather than having them automatically deducted from your paycheck), but you’re also responsible for paying them more often, you need to be disciplined about setting money aside. That means you need to set aside enough money each quarter so you can pay your estimated taxes. The smartest thing you can do is set aside that money each time you get paid. For instance, if you get paid each month, each month you should take out a third of what you’ll need to cover taxes for the quarter.

Know Your Schedule

Most freelancers operate as sole proprietors, which involves reporting income or loss on Schedule C (Form 1040). However, other entities might file a Schedule C, including businesses just reporting net profit, businesses without product inventory and businesses boasting less than $5,000 in expenses.

Know Which Deductions You’re Eligible For

IRS.gov has a full list of deductions that businesses are typically allowed to claim, but among them are things such as business use of your home or car, employee pay, retirement plans, interest and even certain taxes.

Keep Track of Everything

Because you could be eligible for a wide variety of deductions and credits, it pays to keep track of all of your receipts and other financial transactions. If you merely “guesstimate” when it comes time to pay your taxes, and your guess is significantly off, you could trigger an IRS audit – and potentially additional fees and penalties. Instead, log your expenses as they occur. Accounting software can help you record as you go.

Don’t Do It All Yourself

As a freelancer or independent contractor, your instinct might be to tackle everything on your own. Try to ignore that instinct. The tax hurdles you face are far higher and more numerous than traditional workers. So are the risks of penalties and audits.

The tax professionals at McManamon & Co. specialize in small to midsize businesses operating across a broad spectrum of industries. And we can help even the smallest of businesses – even freelancers – position themselves for a wide range of tax credits and deductions.

Don’t go it alone. Call McManamon at 440.892.8900 or contact us online today!

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