It’s that time a year again. The season we either love or hate — tax season. We absolutely loathe this season if we owe anything. But if the government issues a refund, then it’s a glorious, champagne-popping time of year. Whichever side of the emotional coin toss you land on, the deadline to file is almost here.
Because so many freelancer designers come to us for advice, we decided to run a refresher on filing taxes as a freelancer. Hopefully, you’ve already filed your taxes, but if you’re running up against the deadline, here are a few general tips. Keep in mind that you’d still want to consult a tax professional as everyone’s financial situation varies and the basics doesn’t necessarily completely satisfy legal obligations.
Freelance Tax Basics:
Freelancers need to pay an estimated tax quarterly and file annually. There is an added tax for self-employed individuals, simply called self-employment tax (SE tax) and that needs to be paid in addition to the income tax. This basically means social security and medicare that would’ve been deducted from earnings if you were a direct employee for a company. Whereas a company would record your social and medicare deductions for you, as a self-employed freelancer, you’ll need to do your own record keeping and ensure payment of those mandatory taxes.
If your freelancing net income equals or exceeds $400, you’ll need to file an income tax return by filling out the form 1040. You can figure out your net income by subtracting your profits from your business expenses.
Tax Filing Tips
The IRS recently published these 6 tips for sole proprietors and independent contractors:
- Self Employed Income.Self-employment can include income you received for part-time work. This is in addition to income from your regular job.
- Schedule C or C-EZ.There are two forms to report self-employment income. You must file a Schedule C, Profit or Loss from Business, or Schedule C-EZ, Net Profit from Business, with your Form 1040. You may use Schedule C-EZ if you had expenses less than $5,000 and meet other conditions. See the form instructions to find out if you can use the form.
- Self Employed Tax. You may have to pay self-employment tax as well as income tax if you made a profit. Self-employment tax includes Social Security and Medicare taxes. Use Schedule SE, Self-Employment Tax, to figure the tax. If you owe this tax, make sure you file the schedule with your federal tax return.
- Estimated Tax.You may need to make estimated tax. People typically make these payments on income that is not subject to withholding. You usually pay this tax in four installments for each year. If you do not pay enough tax throughout the year, you may owe a penalty.
- Allowable Deductions.You can deduct expenses you paid to run your business that are both ordinary and necessary. An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is helpful and proper for your trade or business.
- When to Deduct.In most cases, you can deduct expenses in the same year you paid for them, or incurred them. However, you must ‘capitalize’ some costs. This means you can deduct part of the cost over a number of years.
To find the forms you need and more detailed publications, visit the IRS site.
IRS offers a relatively new option called Free File. Free File is a service on the IRS website that allows you to file free online either through their fillable forms or through the 14 tax preparation companies that have partnered with the IRS. Obviously, filing taxes are free if you are doing it yourself, but this option might be worth looking into if you are interested in the tax prep companies (note: the tax preparation companies are only free if you make under $60k a year.) View the IRS site to learn more about the service.
This is a short promotional video the IRS produced advertising the Free File service:
The Wall Street Journal recently published a more in-depth article on Free File’s limitations. To see their research on the subject, view the article here.
Keep in mind that taxes need to be filed by April 15th. If you can’t make the deadline, you may apply for a six-month extension. But you must apply for the extension by April 15th. To see more about this process, view the IRS guidelines.