Filing taxes is the worst – it’s confusing, annoying, and worse than going to the dentist. But since death and taxes are the only things that are inevitable in life, you have to put your big kid pants on and do it before April 18.
And if you’re someone who has a full-time job and a freelance gig, you may have no idea what you’re doing or that some tax rules are different. If you made more than $400 from your side job in 2015, it is fully taxable and must be reported on Schedule C (Form 1040).
Here are 7 things you should know:
1. You're going to get taxed a lot
Your side job is your baby, it’s your business, even if it’s not incorporated. And while the total percentage of how much you’ll be taxed depends on how much you make, expect 20 to 30 percent. Why so high? Essentially, you’re being double taxed as both an employer and an employee. It also feels like a lot because with your regular full-time job, you’re taxed on every paycheck and you almost get used to that money being taken out – almost like it was never yours to start – but as a freelancer, you’ve had that money all year so that much being taken away in one fell swoop is hard to digest. As a freelancer, you must remember to put money aside all year so you’re ready to pay in full during tax season.
2. Good record keeping is key
I am an extremely organized person (I may or may not have OCD), and as a freelancer, my organization comes up BIG during tax season because I’ve kept detailed records throughout the year. Keeping accurate and organized records all year – whether it’s through Excel spreadsheets, invoice apps, or old-fashioned filing and storing – makes it easier to calculate your side earnings, deductions, and expenses come tax time, saving yourself (and the IRS) a lot of time and stress.
3. A 1099 is like a freelancer's W2
Know it, understand it, and get it, specifically a 1099-MISC form, because that’s what’s used for miscellaneous income like what a client pays you. And the difference between a W2 and 1099-MISC is what’s reported versus what’s not reported — while your full-time job withholds taxes all year, your freelance job doesn’t. None of that information will be on your 1099-MISC. Since it’s not your client’s responsibility to withhold things like income, social security, and Medicare taxes from you, it’s your job to figure it out come tax time. Don’t fret – Schedule SE can help you.
4. Not every client will give you a 1099
And that doesn’t mean Christmas came early. If you don’t receive a 1099 from your client (you should have received one in the mail in late January), you still have to report it. What’s more, sites like PayPal do not send out a 1099 unless you make more than 20k, so keep that in mind if you use e-commerce web sites to create and send invoices. While 1099s help you file, the lack of one does not excuse you from filing a tax return.
5. Deductions can save you some moola
Everyone loves saving money, right? "This is where tax deductions come in," says Joe Rehm, enrolled agent at Tax Defense Network, LLC. "The more allowable tax deductions you have for freelance work expenses, the less you’ll pay. For instance, if you bought uniforms or equipment for your contract job, you can deduct the total cost of these items from what you owe for taxes." The IRS has a 22-page document that lays out specifically which deductions you may eligible for when filing taxes – whether you’re full-time, part-time, side gig, slow gig, or no gig – and I’d advise you to read that in your free time and discuss them with a tax professional. Specific tax breaks for freelancers also include meals, travel, software, vehicles, supplies, utilities, and education so if they apply to you, make sure to denote them on your tax return.
6. You need to make quarterly payments
If you thought paying taxes once a year was terrible, I’ve got some bad news for you – freelancers need to pay them quarterly on April 15, June 15, September 15, and January 15. BUT why? "The IRS works on a rolling basis with this withheld money, so they don’t like freelancers paying it all just once," my colleague Colin Lalley explains. "As something of a compromise (so they don’t have to file taxes each time they get payment for a job), freelancers pay estimated taxes quarterly." If you don’t pay your estimated taxes in a timely fashion, you may be liable for additional tax penalties, so use this 1040-ES form to keep you on track.
7. Enlisting professional help doesn't mean you're dumb
Unless you’re a CPA or a tax whiz, getting a tax professional to help you wade through the freelance muck and mire will be beneficial, especially if it’s your first time having a side gig. Rehm says figuring out deductions is tricky and you don’t want to write off the wrong thing or something the IRS doesn’t allow. Plus, paying a chunk of money all at once – whether it’s quarterly or annually – is tough to calculate and a tax professional can help you with both your full-time taxes and freelance taxes and create a schedule that works, helping you pay the correct amount on time.
Being a freelancer has its pros and cons but don’t let tax season get you down. If you start researching and organizing now, you’ll be ready for April 18. And if you already filed and it was a horrible experience, now you’ll be more prepared for next year – and next quarter – because now you have more knowledge on what to do and what to expect.