5 Ways Freelancers
Can Master Tax Season
Words by Geraldine Orentas
Freelancers, Brace Yourself! Tax Season Is Here & You Might Not Be Ready For It
Freelancing has many benefits, but by the time tax season arrives, many freelancers find themselves short of money, drowning in questions, and reading every possible tax guide on the market. While you can make some deductions as self-employed, you’re taxed entirely differently as a freelancer than when you work with a company. This freelancer-friendly tax guide will go over budgeting and market-specific tips to set you up for success when filing this tax season.
Budgeting for Taxes as a Freelancer
When I had a full-time job, my employer was responsible for sending money to the IRS at regular intervals throughout the year. Once I went freelance, I was required o send these quarterly payments to the IRS. Apparently, I never received the memo because I didn’t do my quarterly taxes and was faced with a hefty fine after my first year as a freelancer. [insert cringe emoji here]
Leanne de Araujo, a Content Analyst from the UK, had a similar experience. “I got burnt when I was an IT contractor because I should have saved my tax money before the deadline. That’s something I would highly recommend – save your tax money in a separate account.”
Most states require that you file estimated taxes when quarterly taxes are due. These estimates are based on your quarterly income or what you think that will be. If you miss these deadlines, the IRS will do one of the things they do best: impose penalties! So, save these deadlines to avoid paying fees on taxes:
April 15th
June 15th
September 15th
January 15th of the following year
You can use Form 1040-ES to help calculate your estimated tax payments. But, calculating taxes can get confusing as a freelancer. To get your quarterly tax, you have to divide your tax liability for the previous year by four.
Total tax liability = self-employment tax, income tax, and other state taxes
Here’s an example of how this looks:
$8,000 (estimated income tax owed) + $12,000 (estimated self-employment tax owed) / 4 = $5,000 (quarterly tax payments)
Saving for Taxes
Most professionals recommend keeping 25% to 30% of savings to help cover income tax and self-employment tax. Here’s how you can budget for taxes as a freelancer:
Identify the tax amount when you get paid: Set aside the money marked as taxes whenever you get an invoice paid. Then, automatically transfer that money to a savings account you label “taxes.”
“Pay” your taxes at the end of the month: Another method is to “pay” your taxes to your savings account by the end of the month. Set aside at least 25% of your income before you begin messing with next month’s bills.
Pay taxes earlier: You don’t have to wait until the quarterly tax due dates to pay your taxes as a freelancer. Since freelancing income is inconsistent, consider paying your estimated taxes when you have the money rather than waiting until the due date.
How Different Types of Freelancers Manage Taxes
At Two Halves, we work with freelancers from all backgrounds, each with their set of challenges and strategies to manage their taxes. We asked a few freelancers how they managed their taxes, and here’s what they had to say.
“I wish I knew that charging more for my work was also important when paying my taxes,” says Rachelle McCoy, Marketer. “I came into the freelance world without any knowledge of the accounting world, better yet, finances. Multiple times I had heard the phrase, ‘make sure you charge more to make more profit,’ but my first tax year, I realized that I was putting more money towards my taxes than I was holding in my actual pocket. In other words, I had more ‘expenses’ than profit, but now I feel like I know so much better!
“The first year I started freelancing, I had no clue how to itemize my expenses – I was just taking quick post-it notes here and there,” says GraceAnne Trumpfeller, Content Strategist. “Once it became tax season, I rustled through tons of unorganized notes and receipts, from software subscriptions to new tech. I wish I knew how valuable these expenses were when first filing taxes as a freelancer, and I have learned my lesson since then! All of my recurring expenses are now in a routinely updated spreadsheet.”
For Amie Colosa, Web Designer & Developer, figuring out her taxes was as crucial as figuring out how to organize her business. “I wish I knew how to set up a business bank account as soon as possible. This would have helped me ‘see’ the money set aside for taxes instead of getting lost in transactions.”
“Trying to get my head around exactly what tax should I or shouldn’t be paying was the worst part of going freelance for me,” says Rach Baines, Digital Marketer. “While there is lots of info out there, a lot of it is full of jargon that I just couldn’t understand! I was terrified of getting it wrong and ending up with a huge bill that I couldn’t afford, or worse, being accused of trying to cheat the system when I genuinely didn’t understand it! The best advice would be to seek a professional to help wherever you can.”
Your Quick Guide to Tax Deductions
As a freelancer, you can save hundreds of dollars by deducting business expenses. Or, to quote my favorite Schitt’s Creek character David likes to say, “the write-off people will pay for it!” Of course, we know that business expenses have to be necessary and ordinary in real life, and you need to have documentation of any expense you want to deduct, just in case you get audited.
Here are the most common tax deductions you should keep track of throughout the year:
Software and other subscriptions: Things like Dropbox, Adobe Creative Cloud, website hosting, CRMs, subscriptions to fonts and graphics, client-sharing software, project management software, etc.
Cellphone: If you use your phone for business purposes, you can deduct a percentage of your bills.
Business cards and advertising: Designing, printing, and buying ad placements are all considered marketing expenses.
Office supplies: Everything from notepads, postage, paper, pens, and other necessary supplies can be deducted.
Parking, tolls, and mileage: If you have to go for a business meeting, save those receipts, those are considered business expenses.
Professional development: When you invest in networking and education, including webinars, online courses, and more, you can deduct all related signup fees.
Subscriptions: You can deduct subscriptions of magazines, journals, newsletters, newspapers, and other subscriptions as long as they’re useful for your business.
Memberships: If you belong to different associations, you can deduct membership fees from your taxes.
Health insurance: As long as you don’t get health insurance from a sponsor, you can deduct 100% of your monthly premium.
Getting Ready for Taxes as a Freelancer
Whether you’re filing your taxes by yourself or with the support of an accountant, the more you learn about your business and how taxes work, the better. Before you even start your filing, gather as much information as possible.
Look through the 1099 forms you receive this year, create a spreadsheet of all the expenses you incurred during the year, and calculate how much you’ll pay in self-employment tax to verify you have the money.
And, if I can personally offer a piece of advice: start accounting and organizing your quarterly taxes to get ready for next year’s taxes.