Tax Resources for Freelancers

Tips, tricks, and tools.

Taxes are different for freelancers, and what you learned from the 9-5 world is no longer applicable. One of the most common questions we get—especially from new freelancers—is "How do I file my taxes?"
Here's a set of tips to help you out.


What you'll need to do:

  • You'll need to pay taxes quarterly. As a self-employed individual, the IRS expects to get a cut throughout the year instead of just in April. IRS form 1040-ES will help you figure out how much to pay. Payment due dates are generally April 15, June 15, September 15, and January 15, so mark your calendar.
  • You'll need to fill out a few more forms. The IRS gets a bad rap, but their site is actually easy to navigate. That's good because you may need to find a few extra forms, including: Schedules B, C, D, E, or SE; and Forms 4562 or 8829.
  • You may want to hire a tax professional. With all of the extra things to keep track of as a freelancer, you might want to hire someone who is experienced with freelancers to prepare your taxes.

Bonus: you can deduct the cost of tax preparation services from your income.

Things to keep in mind:

  • You get double taxed. This is a painful one. In addition to paying a tax on your income, you'll probably need to pay an additional tax that covers both employer and employee contributions for Medicare and Social Security. For 2012, this rate is 15.3% (13.3% until February 29, 2012). Remember that you can deduct many of your expenses from your earnings.
  • Your clients aren't withholding taxes. In most cases, clients don't withhold taxes the way employers do. To make up for that, you'll want to put aside about 30% of your income into a separate account that you can draw on when you need to pay your taxes.
  • Every state is different. Tax laws differ dramatically from state to state. (For example, 7 states have no individual income tax at all. Kinda makes you think about moving, huh?) Some cities impose an income tax, while others charge a license fee for self-employed individuals. A local tax professional can make sure you're paying the right amount to the right people.

Words, words, words:

1099

{ ten nahyn-tee-nahyn }

An IRS form used to show your miscellaneous income. Most freelancers' wages are filed on 1099s.

Deduction

{ dih-duhk-shuhn }

An expense that you can subtract from your income when calculating a tax rate.

Self-employed

{ self-em-ploid }

What the IRS calls people whose earnings come from work done on their own, rather than as an employee of a company. The self-employed pay double taxes and need to pay estimated taxes every quarter.


Deductions

All business expenses are deductible, but make sure you keep your receipts—both the proof of payment and the invoice from the vendor. Often, your best bet is to get a tax professional to walk you through your options.

Here are some of the big things that can reduce your tax bill:

  • Unpaid wages.We're working to put an end to freelancers not getting paid. In the meantime, you may be able to write off that bad debt.
  • Meals and entertainment.Meeting a client for lunch? The IRS will let you deduct 50% of the cost.
  • Professional services.Another reason to spring for an accountant. The cost of tax preparation (or the cost of a lawyer or other professional) is fully deductible.
  • Professional organizations.Freelancers Union is free to join, but other organizations might charge dues. Those fees are deductible.
  • Your computer.Not only can you deduct the cost of your computer, you can also deduct depreciation, the cost of normal wear and tear.
  • Professional development.Take a class to learn Google analytics? Subscribed to a journal to keep up with new developments? Both are deductible.

It may seem obvious, but:

  1. Save your receipts. If you work (or meet clients) at a coffee shop, you can deduct the cost of your coffee. But make sure you save all those receipts so that you can prove it.
  2. Collect your 1099s. Every client who pays you more than $600 must file a 1099 and send you a copy. Keep these together so you have all your forms in one place.
  3. Always file your taxes. You may not be able to pay the full amount, but file now and pay what you can afford. You'll generally be able to work out a payment plan with the IRS. The worst thing you can do is not file.

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