Tax tips for the self-employed can help you reduce your taxable income and the amount of tax you pay. They can also help you stay organized to avoid tax problems, especially if your freelance business suffers net losses and you're asked to prove a profit motive. Here are some tax tips to keep in mind if you're a freelancer.
Organization Is Key
The first step to organizing your freelance tax records is to get organized. Separate any freelance income from any other forms of income you may have. Clients may send you a form 1099-MISC in January or February, which reports any payments you received the previous year. The IRS also receives copies of any 1099s you receive.
The amount of business income you report on Schedule C Line 1 must be greater than or equal to the amount reported on your forms 1099. If it isn't, you'll be audited. The best way to avoid an audit is to report all of your income to the IRS.
Know What You Can Deduct
One of the best ways you can maximize your deductions as a freelancer is to know what your business expenses are. Use a spreadsheet program, a personal finance program, or even a stack of envelopes to sort and keep track of your business expenses. Some deductible business expenses include:
- Advertising, such as business cards and web-marketing costs
- Insurance, for life, property & casualty, or business, but not health
- Interest paid on loans you took for business purposes
- Legal and professional fees, such as those charged by your accountant
- Rent on business property
- Office expenses and routine supplies
- The costs of business-related travel, meals and entertainment
- Costs of trade magazines, journals, web subscriptions and software
You can even deduct the cost of reference books such as dictionaries and thesauri. If you're self-employed and buying your own health insurance, this can be deducted on Form 1040, Line 31; or, if your business has suffered a net loss or made zero profit, you can deduct your health insurance as a medical expense.
Remember Your Self-Employment Tax
As a freelancer, you're responsible for paying your own Social Security and Medicare Taxes. The Self-Employment Tax, as it's called, is figured on Form 1040 Schedule SE, and represents 15.3% of your net profit. If you were employed by someone else, you'd pay only half of this tax, while your employer would pay the other half. But, as a freelancer, you're required to pay the whole tax.
To avoid coming up short at tax time, you should set aside money at least every quarter to pay your Self-Employment Tax. Try to estimate what your net profit will be at the end of the year. If you expect a net profit of $1000, then set aside $153 that year, divided into four quarterly payments.
If you enroll in the Electronic Federal Tax Payment System, or EFTPS, you can make estimated tax payments by phone or web, and have the payments debited from your checking account. You can even designate which part of your taxes you'd like to pay with each payment.