The world of freelancing is exciting and empowering – but while you’re free to set your own work hours and only take projects and clients that interest you, you’re also now in charge of more tax preparation than you would be under an employer.
The process can be stressful for many, so to help you avoid a frantic struggle next tax season, here are a few tips for handling your tax return as a freelancer.
Keep Good Records
This is just a good financial habit in general, but make sure you’re keeping detailed documentation on all of the money you’re receiving or spending throughout the year.
Make a master document that includes every bit of information about money: track all paystub amounts and make note of any tips, taxable refunds, capital gains, alimony, and any other source of income you see over the course of the year. Include dates, amounts, who you’ve received the money from, and the reason or name of the project associated with it. You can do all this by hand or with computer software or a financial tracking program to help.
Figure Out Your Business Expenses
Once you’ve figured out how to keep track of your income, you have to monitor what you spend, too – so you should learn what you can write off as a business expense and what you can’t. There are even some partial deductions you can make, like deducting part of your rent or mortgage if you have a home office.
In general, things you can include as part of your tax deduction are:
● A dedicated home office
● Office supplies (a printer, paper, computer software, etc.)
● Business meals & travel expenses (you can deduct 50% of work meal costs and some of the travel mileage if you drive)
● Medical insurance (if you’re not already covered by a spouse’s employer’s plan)
Things like general food purchases and vacation travel don’t count (that’s right, there’s no PTO in freelancing), so don’t try to write off non-work expenses. Remember to keep all expenses – personal or business – well-documented and filed neatly over the course of the year to save yourself the headache come tax season.
Ask for Help
You may dread the thought of hiring an accountant or tax preparer, but there are plenty out there that specialize in making the freelance tax process as painless as possible. You can also consult with someone who does financial planning, as they can help you with budgeting and prevent you from owing any back taxes in the future.
When you sit down with a tax preparer, be sure to fully explain the extent of your business and precisely how you conduct it. Depending on your line of work, some deductions may be fully written off or only just partially. If your wallet is already tight as a freelancer and you’re hesitant to consult someone, don’t be. A good accountant or financial planner can help you more than you think.
Learn the Difference Between Tax Forms
There are tons of different tax forms you’ll have to keep track off, some of which you’ll fill out yourself and some of which are given to you by clients. It may give you some anxiety to look at all the possible forms, especially if you don’t know the difference between them, but understanding the basics can clear up a lot of misinformation and fear.
When you complete work for a client that totals over $600, you may receive Form 1099. These are forms filled out by customers that indicate what they’ve paid you and are useful for record-keeping purposes.
Form 1040 is what you’ll be filling out – you have to submit one every year. It’ll detail all your deductions and write-offs, so it’s hugely important to be accurate on your 1040. It determines how much tax you’ll owe or what you’ll receive back. It’s just a two-page form, but it’s critical you spend time making sure you’re filing it accurately. If you need more information, you can learn about IRS Forms 1040 at Locus Tax.
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