Being your own boss has a lot of advantages – setting your own hours, working in comfy clothes, and no annoying co-workers (unless you count the cat, who decides to nap on your laptop). There are a few disadvantages too – including dealing with taxes.
Freelancers – whether or not you are officially incorporated – need to be diligent come tax time or else face scrutiny from the IRS. To make sure you don’t over (or under) pay the IRS, here are five tax tips every freelancer needs to know:
Put money aside.
Freelancing’s dirty little secret is that when it comes to Social Security and Medicare taxes, you get hit double. Not only do you need to pay your portion, you also pay the employer’s portion. Let’s say you did $10,000 of work for Company A during the past year. You not only pay taxes on your earnings like a typical employee, but you also pay the company’s portion, too. One way around this problem is put money aside from every check that comes in to pay your taxes.
Track your spending.
Whether you use an Excel document or a fancy software package, keep a list of any business expenses, whether it’s your phone service, office supplies, lunches out with key contacts, or professional memberships. Along with tallying up that information, keep your receipts just in case the IRS questions whether you really spent $500 on ink for your printer. Utilize an accordion file for all of your receipts, making the different categories with titles like office supplies, cell phone, networking, and professional services.
Look at your deductions.
If you have a room in your home dedicated to your business, you can use Form 8829 to calculate your home office expenses. Measure the amount of square feet of your work space and subtract from your home’s total size to get a percentage. If you use 5 percent of your home for your business, that means you can consider 5 percent of your home’s expenses, such as utilities, mortgage, rent and more, as a business expense. That’s definitely a win.
As mentioned earlier, being self-employed means you get hit twice come April 15. Many freelancers take that tax bill and pay quarterly estimated income taxes to spread out the pain. How much do you need to pay? The Self-Employment Tax is figured out on Form 1040 Schedule SE and is roughly 15.3 percent of your business’ net profit.
Get some help.
Don’t be afraid to ask an accountant for help when it comes tax time or assistance in setting up a simple retirement plan. An accountant is especially helpful if your business is incorporated. He or she can help guide you through the tax maze. Every cent you pay for their help will be worth it – especially if it saves you money down the road.
Being organized and keeping good records (and receipts) are two key items to remember when doing your taxes. It will not only translate into spending less time searching for documents when it comes time to fill out your 1040, it will help if you ever get audited.