Handy Tax Tips For Freelancers

Handy Tax Tips For Freelancers Handy Tax Tips For Freelancers Handy Tax Tips For FreelancersEmployees get taxes deducted from their paychecks, but freelancers have to handle all that for themselvesâ€"which can mean a nasty surprise come tax season.Being a freelancer comes with advantages, like choosing your own hours and being your own boss, but it also has its own sets of unique challenges. Think back to the knights of old who had a “free lance” which they would offer to different lords if the price was right. Then they would spend the next few months sending invoices to those lords, hoping to get paid for the fighting they actually did.Just like those knights of old (that we entirely made up, by the way), freelancers today will often face difficulties when it comes to getting paid for the work they’ve done. But freelancers today also face a challenge the knights of old never had to deal with. And that challenge is the way the American tax system can be rougher on freelancers than non-freelancers in a similar capacity.While tax returns a re generally lower this year, the biggest decision many folks will face is still  whether or not to take out a cash advance on their refund or just wait for it to arrive. For freelancers, on the other hand, a lack of planning could lead to them owing the IRS a lot of money. Freelancers are doing it for themselves.“There are more freelancers in the United States than ever, with 3.7 million added to their ranks since 2014,” explained CPA Logan Allec (@moneydoneright), owner of the personal finance website  Money Done Right. “And while every freelancer welcomes the extra cash in their pocket, they may not be so ecstatic about filing their tax return come April 15.“In fact, many freelancers are shocked at how much taxes they owe on their freelance income.  Part of this shock comes from the fact that many freelancers pay their entire tax bill for the year when they file their tax returns. This is different from income earned as an employee, where the IRS mandates that a certain amount of taxes be withheld from each paycheck.“There is also the issue of the self-employment tax: in addition to regular income taxes that are calculated based on the tax brackets for the year, freelancers also have to pay self-employment tax on their freelance income. The self-employment tax is comprised of the Social Security tax and Medicare tax. Employers by law pay half of these taxes for their employees, with the employees only having to pay the other half, but a freelancer is responsible to pay 100 percent of their Social Security and Medicare taxes all on their own via the self-employment tax.”Which is why we spoke to experts like Allec and others to offer some tips to help freelancers with their taxes Pay as you go.If there’s one piece of advice nearly all of our experts suggested, it’s for freelancers to avoid paying your taxes all in one go. As Allec explained above, freelancers often dont have taxes withheld from their paycheck, which means a much bigger bill c ome tax time. That’s why the experts suggest paying some of your taxes throughout the year.“Consider setting up quarterly payments,” suggested CPA  Scott Vance. “The IRS form and directions for figuring your quarterlies are really not that hard or if you get a tax expert to help, especially if it is not tax season, the little bit of fees and aggravation up front will save you a multiple of those if you wait till tax season.”OK, so that’s one expert. Need more?“As a long-time freelancer/self-employed copywriter, I offer that tax bills should not be an issue if one is paying quarterly estimated income taxes (state and federal),” explained writer Caryn Starr-Gates (@StellarCopy). “That way, come April, the situation should not be any different than anyone who’s earning a steady paycheck from an employer who is making all the mandated payroll deductions.Sometimes you owe more, sometimes you get a refundâ€"but you usually avert nasty surprises because you’ve already been paying in. Be sure to set aside a set amount every month as your invoices are paidâ€"either flat amount or percentage, whichever worksâ€"in a separate savings account earmarked for tax payments.”As Allec pointed out, you might not have much of a choice when it comes to paying quarterly:The IRS and many states actually require most taxpayers to pay their taxes quarterly.  Employees dont have to worry about this because their employers withhold the appropriate amount of taxes out of their paychecks, assuming they completed their Form W-4 correctly (which is a different discussion!).”Half-business, half-person, all freelancer.You’ve probably read headlines about all the methods big corporations use to reduce their tax burdens. Wouldn’t it be nice to get access to just a little bit of that corporate magic for yourself? Well you might just (sort of) be able to!“Having the right entity set up is important,” advised Candace Stevens, founder of  Number Cruncher, LLC (@Llc Number). “If a freelancers earnings are high enough, usually over $50,000 a year, it is a good idea to look into incorporating. S-Corporations are a pass-through entity where the profit is only subject to income tax. A sole proprietor will pay self-employment tax at a rate of 15.3 percent on the profit plus income tax.”Jai Kumar, marketing manager for  Rapid Filing Services (@RapidTax), shared a blog post that goes into detail about how the new tax code adjustments will affect those who freelance, whether they’ve incorporated or not.Be prepared.As with almost any financial decisions, the more time you give yourself to plan, research, and find the right people to consult, the better off you’ll be.“Spend the money to sit down with a tax expert before tax season,” recommended Vance. “An hour spent discussing issues seen by the expert and the recommendations that come with it will save you a ton of time at tax season.”Meeting with a tax expert will be an additional cost, but it’s one that can save you money in the long run.“Also being aware of the relevant deductions one can still takeâ€"depending on your field and work environment (contract work on site vs. home office, for example)â€"can help reduce adjusted gross income, so speak to your tax advisor about what you should be tracking all year and deducting on your return,” suggested Starr-Gates.“Meeting in the 4th quarter to go over expected annual income, in order to prepare properly for the coming year and tax season, is also advisable, so that your accountant can make any necessary adjustments to the next tax year’s estimated quarterly amounts (and vouchers).”Evading tax evasion.Mistakes are more likely to happen when you’ve got an irregular tax situation. But fear not! Even if you screw up or just can’t afford your tax bill, you can still avoid the Al Capone treatment.“If you do get caught and owe significant taxes, dont hide,” Vance cautioned. “The IRS is easy to work w ith as long as you are upfront. I have had clients come to me who havent filed for years because they owed a large amount and decided not to file because they didnt have the money to pay for it. The IRS has a method to set up payments that is generally accepted as long as you propose payments that satisfy the debt within six years.”Paying taxes as a freelancer is never going to be a good time. But hopefully this advice will make it a little less painful. If youre looking to earn more moneyâ€"possibly through a freelance gig or side hustleâ€"check out these other posts and articles from OppLoans:Need Cash Fast? Try These 10 Great Side Hustles8 Financial Tips for FreelancersHow to Vet Potential Renters6 Expert Tips to Start Your Side HustleDo you have a question about taxes? Let us know! You can find us  on  Facebook  and  Twitter.  |  InstagramContributorsLogan Allec (@moneydoneright) is a CPA and owner of the personal finance website  Money Done Right.    After spending his twenti es grinding it out in the corporate world and paying off over $35,000 in student loans, he dropped everything and launched  Money Done Right  in 2017.    His mission is to help everybody â€" from college students to retirees â€" make, save, and invest more money.    Logan resides in the Los Angeles area with his wife Caroline.Jai Kumar is  Marketing Manager at  Rapid Filing Services (@RapidTax), an online tax preparation company. They file current and prior year tax returns for thousands of people every year while providing them with free high-quality customer  service.Caryn Starr-Gates (@StellarCopy) is a professional copywriter whose career dates back to the days of the typewriter. She works in advertising, marketing and public relations, writing in all media (print, broadcast, digital) for a broad range of clients across many industries. She has worked on regional and national campaigns for consumer package goods, retail, hospitality, travel, banking/financial services, education , professional services and many other types of accounts. She launched StarrGates Business Communications in 2009 to support her clients’ marketing needs as well as help agencies (advertising/ marketing and public relations) provide professional copywriting services to their clients.Candace (Candy) Stevens is a Tax Preparer/Accountant who works tirelessly to help her clients have the lowest tax liability legally possible and help them to become financially successful. Before starting  Number Cruncher, LLC (@LlcNumber), Candy owned and operated many different businesses where she was responsible for the bookkeeping and accounting while being a full-time Mom to 4 amazing kids. Candy now crunches numbers and advises a wide variety of clients on the ever-changing tax laws and strategies while developing new friendships along the way. Candy enjoys being with family and friends, dancing, camping, paddle boarding, skiing, giving people hugs Oh, and of course, doing taxes. Candy is avail able to help you with your Tax Preparation and Accounting/Bookkeeping needs. She can be reached at numbercruncherllc@gmail.com.Scott Vance is an Enrolled Agent serving the greater Raleigh, NC area. He began his career in tax and accounting soon after retiring from the Army. Scotts military background allows him to closely understand the issues faced by our military personnel, but he works with clients from all walks of life. Scott was born and raised in Pennsylvania. He has lived in numerous US States and foreign countries as would be expected from a military member. The highlight of his overseas experience was a year spent in Kathmandu, Nepal advising the US Ambassador to Nepal on foreign military training.  He is married to Amy Douglass, also from Pennsylvania and they reside in Holly Springs. Together they have a son, Brandon.