Freelance Income Tax: How to Prepare for Taxes

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Freelance Income Tax: How to Prepare for Taxes

Did you know that as of 2021 there are 58 million freelancers in the United States? It’s no surprise that more people are opting towards freelancing because of the freedom it comes with. If you are new to the world of freelance, it is important to get familiar with freelance income tax to stay out of trouble with the IRS. 

We have put together this guide to share the ins and outs of self employed taxes. Read on to learn more. 

Forms Needed

To file income taxes properly as a freelancer, you will need several forms. One of these forms is a Form 1099-MISC, which is sometimes called a Miscellaneous Income tax form. This tax form calculates what your tax liability is as a freelancer.

If all of your income was made through freelancing, then all of that income would appear on a 1099-MISC. Also, any businesses that you did contract work for will send you a 1099-MISC form, which you will need to file in your taxes. 

Another form that freelancers might need for taxes is the 1099-K. You will receive this form if any of your payments were sent to you as a payment settlement entity or PSE and were greater than $600. Keep in mind that PSEs also include payments received through third party applications such as Stripe, Zelle, Cash App, Venmo, and PayPal. 

If you want to split up your taxes into four separate payments throughout the year, then you will need a Form 1040-ES. This form you will use to pay an estimated quarterly amount.

For those that would rather do everything online, you can opt to skip this form and pay online through the IRS website. The usual quarterly payments have to be paid by the following dates: April 15th, June 15th, September 15th, and January 15th, but ask your accountant or check the IRS website for any changes to these dates. 

Deductions

There are deductions you can take as a freelancer because you are considered self-employed. The government recognizes freelancers as a business entity, even if you have not incorporated your business. This recognition is what allows you to take certain business tax deductions that regular W-2 employees can’t. 

If you work from home and have an office set up in your house, you can write off the cost of your office on your taxes. This is calculated by the overall size of your home or apartment in relation to the space you use as your home office.

As of the writing of this post, the simplified option in your taxes to deduct for your home office space is $5 per square foot. The key is that your home office has to only be used for business purposes. 

When you take the time to incorporate your freelance business, there are expenses you can write off. Anything you had to pay to legally set up your business is considered a legitimate business deduction. For example, if you have to take out a loan such as quality control loan reviews to incorporate the business, then this is a valid deduction. 

Another common tax deduction includes mileage and travel expenses. If your freelance business requires you to drive or travel in order to accomplish your projects, then you can write off these expenses on your taxes. Every year, the IRS establishes what the standard mileage rates are, so make sure that you are keeping track of the miles you drive every time you get into your vehicle for work. 

These are only some of the most common deductibles, but there are also vehicle expenses, advertising materials, business meals, health insurance, internet bills, phone bills, legal services, etc. that you can deduct.

Keep Daily in Mind

Most tax professionals always advise someone that is self-employed to spend time each day, vs leaving everything for last minute during tax season. Take the time to update your income and expenditures as they come in on some type of software or spreadsheet. 

Many freelancers prefer using software such as QuickBooks because they can easily track expenses. There are also accounting apps you can download on your smartphone to scan receipts to avoid having a mountain of receipts thrown around. 

Although freelancing sometimes feels like a side gig, to the IRS it is not. Freelancing in the eyes of the IRS is a business, so you have to keep very detailed and accurate records of all of your income and all your expenses. 

Estimating Quarterly Taxes

If you will owe at least $1,000 in taxes, then you are required to pay these taxes quarterly. Referring to your previous year’s tax return can help you gauge how much money you should be paying every quarter. For those just starting out in the freelance world, an accountant can help you calculate this estimate. 

Unless you have an accounting degree, we do not recommend doing your own taxes, especially in the beginning because you can underpay and find yourself in trouble. Sometimes you might even miss out on deductions because you simply are not aware of certain tax laws or tax changes. 

Feeling Like a Freelance Income Tax Pro?

Now that you have learned more about freelance income tax requirements, you can make better decisions throughout the year on the paperwork you need to keep organized and have on hand for your accountant. We highly recommend contacting a professional accountant as well to help you stay out of trouble with Uncle Sam. 

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