It’s that time of the year again. No, not the run up to the Super Bowl (although it is that, too). No, I’m talking tax season.
April will sneak up on you faster than you think – but you do get until the 18th this year! – and while you still have New Year’s resolutions on your mind, now’s the perfect time to get a head start.
And while salaried employees have the benefit of having their taxes withheld throughout the year and getting … well, benefits, freelancers often have to do a little more legwork. After all, you’re on your own keeping track of your income, and there are a myriad of deductions that may not apply to salaried workers.
To give you a leg up in 2017, we’ve got answers to the top three questions every freelancer needs to know about filing taxes. Even better, we’re bringing you expert advice from Gabriel Bahash of tax prep firm Taxology for his insights and secrets so you’ll be ready to start the new year off right.
#1 What forms do I need to file my taxes?
Why not start with the basics, right? Filing your taxes starts with a few simple forms.
What you need to know:
Salaried employees get a W-2 form. It’s comprised of two main things: how much they got paid, and how much is being withheld.
Unfortunately, things are more complicated for freelancers. You get a 1099 form (technically a 1099-MISC, which tracks miscellaneous income) from each client from whom you were paid more than $600 throughout the year. Each 1099 will show what you got paid, and … that’s it. You won’t have had taxes withheld throughout the year, so you need to make sure you have enough money to pay your full tax bill. If you want to avoid this altogether, use a program like Painless1099 to automatically deduct money for taxes as it comes in. As we’ll get to later, there’s an app for just about everything you need – a couple of them, actually.
When you get your 1099s, check them for any errors. They may be your clients’ fault, but you’re still on the hook for them. The most common errors include misspelling the name and/or address of the freelancer or client, the year, and, of course, the income amount. If the information is wrong, don’t panic: you can contact the client to get a revised form, or contact the IRS for replacement or temporary forms.
If you don’t get a 1099 from a client at all, you can follow the above steps – or not. You technically don’t need to have a 1099 to file your taxes. They’re helpful to make sure you’re reporting the same income amount that your clients are, but not required. The only way an issue would arise is if the 1099 that a client submits to the IRS differs than what you’re reporting, and you don’t have your own copy to compare against.
With your 1099 straightened out, make sure you have any other forms you need.
A Schedule C form will help you get the deductions you need, and you’ll receive statements if you’ve accrued interest from a savings account or were paid stock dividends. Make sure you’re taking everything into account before you start the filing process, or you’ll have to go back and make corrections before you finally submit.
Tax filing season starts starts January 23, and if you have all of the paperwork out of the way early on, filing will be a breeze.
What our expert says:
Bahash mentions that how you categorize yourself can play a big role in how much you’ll pay in taxes – and when.
Many freelancers will be sole proprietors or single-member LLCs and will be subject to self-employment taxes. At a certain point, though, it might make sense to reclassify as an S corp or C corp to change your taxes in your favor. But Bahash warns that this might change your tax filing date, so be aware of how you’re categorized.
- For more about how to get started with (or without) your 1099, read "How to start filing taxes with and without your W-2 or 1099"
- For more on what to do if you don’t get a 1099, read "Can you file taxes without a 1099-MISC form?"
- For an in-depth look at 1099 forms, read "The freelancer’s guide to 1099-MISC forms"
#2 What deductions should I make sure I take?
Worried that your tax bill will be too high? That might be because you’re overpaying.
What you need to know:
No one likes paying taxes. It’s just something we have to do, so we can have roads and stuff. But that doesn’t mean you can’t cut a few corners – legally, of course!
Deductions help you write off the amount of money you have to pay in taxes. Everyone can do it, but since freelancers often find themselves working for anywhere, that mix of business and personal life can pay off. Here are a few (of the many) things you can write off but keep in mind that it’s only when they apply to business purposes:
- Your vehicle. If you’re driving around for business, you can write off the miles or the operating expenses.
- Your home office. Got an extra room in your house? Rather than go to a cafe and deal with bad coffee and spotty wifi, turn that room into a home office. You can write off however much the office is costing you out of your total home costs, including furniture, utilities, and even your mortgage.
- Business dinners. Taking a client out to close a deal? Write off up to 50% of the cost.
- Business items. Whether it’s software or business cards, if its purpose is to grow your business, you can probably write it off.
This is where a tax expert can really come in handy. There are so many potential writeoffs – and opportunities to try to write off something that you shouldn’t – and an expert can help you navigate this labyrinth so you make the most of your deductions without running afoul of the IRS.
What our expert says:
According to Bahash, the deductions you take are largely industry-driven, so it’ll depend on what your freelance specialty is. If you travel a lot, you’ll likely be taking more deductions based on your car (and there can be nuances there, like writing off actual expenses and writing off vehicle depreciation).
Deductions that Bahash mentions are common for freelancers to miss are software expenses, uniforms and related costs (like dry cleaning), and even things like seasonal assistants.
- For an in-depth look at important freelancer deductions, read "7 important tax deductions for freelancers to make in 2017"
- For tips on claiming home office deductions, read "The tricks to claiming home office deductions"
- For some other popular tax deductions, read "Favorite tax deductions of personal finance bloggers"
#3 What tech and tools can help me?
Pen and paper is so 2016. These digital tools can help you bring your finances into the modern age.
What you need to know:
Okay, so we’ve talked about tax forms, and you know you need to keep track of income and what taxes you owe, like Social Security and Medicare. And we’ve talked about the numerous deductions you can make.
How do you keep track of it?
As with most things, the answer is "with your smartphone."
If you’re looking for the right app for you, make sure it’s tracking the right thing: income, expenses, or deductions.
- Income: Unlike salaried workers, who get their income deposited into their bank accounts, as a freelancer you might have to track down your pay. Invoicing isn’t the most fun part of freelancing, but it’s as important as every other part. Why not make it a little easier with invoicing apps? These apps benefit you in a few different ways. First, they take some of the hassle out of tracking down payments. Second, they help you track your income so you have a better idea of where you stand throughout the year, and you won’t have any surprises come your way in April when you thought you got paid $2,500 more than you actually did. If and when you get a 1099-MISC from a client, you can double check it against your record to make sure it’s correct or, if you got paid less than $600 and didn’t receive a 1099, you’ll still be able to report your income accordingly.
- Expenses: Having a budget is a good idea for everyone. But for freelancers, it’s doubly important. Because you don’t have taxes withheld throughout the year, there’s a higher chance that you’re going to owe a lot more in April than someone who has had taxes withheld and therefore has had their payment approximated already. The last thing you want is to realize you don’t actually have enough money to pay your tax bill. That’s why tracking your expenses and spending is so important. Maybe you want a general budgeting app like You Need A Budget; it can help you track money that comes in and goes out. Or you can use Evernote or OneNote to keep track of your spending, scanning receipts directly into your account. There are even specialized apps like Shoeboxed that allow you to scan and organize receipts without the extra bells and whistles so you can focus on the task at hand – knowing exactly what your expenses are so there are never any surprises.
- Deductions: Most people need to track their deductions to some extent, even if it’s just to make sure their charitable donations are doing double duty – helping those in need, and helping their bottom line. But freelancers have more opportunities to make deductions – meaning more things they need to track. Shoeboxed can help with this: If and when you buy things for business purposes, simply snap a picture of your receipt so you know that you shouldn’t be eating that cost yourself. Mileage tracker MileIQ makes a comprehensive driving log so you know which miles were for business and which were for pleasure, keeping an accurate record of what you’re able to write off when you’re on the go visiting clients or professional events.
What our expert says:
Bahash says that whether you’re preparing your taxes yourself or getting someone to do them for you, be prepared when you’re filing. A program like Quickbooks – which Bahash says "isn’t that hard once you get in there" – can help you keep track of income and expenses throughout the year.
Instead of handing over a shoebox full of receipts, Bahash stressed that categorizing your expenses can make the whole process easier, especially if you’re using a tax preparer. Having your expenses itemized – travel, home office expenses, and so on – means that it’s easier and quicker to track down deductions that will ultimately save you money.
- For some of our favorite invoicing apps, read "4 of the best invoicing tools for freelancers"
- For great budgeting apps for freelancers, read "3 budgeting apps that freelancers need"
- For apps to help you track your expenses, read "5 apps to track business expenses"
You might have to do a little extra work with your taxes compared to the average clock-puncher, but that’s why you became a freelancer, right? To take your work – and your money – into your own hands and be your own boss. But that doesn’t mean you can’t take a few pointers along the way. With these tips, you can be done with your taxes and get back to doing what you do best: Tracking down your next client.