How to Handle Freelancer Taxes: A Beginner’s Guide

1. Understand Your Tax Responsibilities as a Freelancer

As a freelancer, you’re considered self-employed, which means you’re responsible for paying both income tax and self-employment tax, covering Social Security and Medicare. Unlike traditional employees, freelancers don’t have taxes automatically withheld from each paycheck, so understanding your tax obligations early on can help you avoid surprise bills.

Key Tax Forms:

• Form 1040: This is the standard income tax form where you’ll report all income.
• Schedule C: Used to report your freelance income and expenses.
• Schedule SE: This form calculates your self-employment tax, which is currently around 15.3% of your net earnings.

2. Set Up a System for Tracking Income and Expenses

Keeping accurate records is essential for freelancers. Track all income, as well as expenses that relate to your business. This not only makes tax filing easier but also maximizes your deductions.

Helpful Tips for Tracking:

• Use a Dedicated Account: Consider setting up a separate business bank account. This makes it easy to see what you earned and spent specifically for your freelance work.
• Expense Tracking Apps: Apps like QuickBooks Self-Employed, Wave, or FreshBooks help track your expenses and income, offering insights and organization tools.

3. Know Which Deductions You Can Take

Freelancers qualify for various deductions that help lower taxable income. Some common deductions include:

• Home Office Deduction: If you work from home, you may be eligible for this deduction. Deduct a portion of your rent or mortgage, utilities, and internet based on the percentage of your home used exclusively for work.
• Supplies and Equipment: From your laptop to office furniture, these expenses can be deductible.
• Health Insurance Premiums: If you pay for your own health insurance, you can deduct the premiums, provided you meet certain requirements.
• Self-Employment Tax Deduction: You can deduct half of your self-employment tax from your taxable income.

4. Estimate and Pay Quarterly Taxes

Freelancers are required to pay estimated taxes quarterly if they expect to owe $1,000 or more in taxes for the year. This helps you avoid underpayment penalties at tax time. The quarterly deadlines typically fall on:

• April 15
• June 15
• September 15
• January 15 (of the following year)

How to Calculate Estimated Taxes:Use your income from previous months to make an educated guess. The IRS has an Estimated Tax Worksheet that can help guide you.

5. Prepare for Self-Employment Tax

One of the biggest differences for freelancers is paying self-employment tax, which is a combination of Social Security and Medicare taxes. This tax rate is 15.3% on your net earnings (12.4% for Social Security and 2.9% for Medicare).

Taking all allowable deductions lowers your net income, which in turn reduces your self-employment tax. Some freelancers also set aside around 25-30% of their income for tax payments, which helps cover both self-employment and income taxes.

6. Consider Hiring a Tax Professional

If freelancing is new to you, a tax professional can offer valuable guidance, especially in the first year. They can help ensure you’re taking all deductions, filing forms correctly, and potentially saving money in the process.

Benefits of Working with a Tax Pro:

• Helps you maximize deductions.
• Avoids costly mistakes.
• Saves time by organizing finances efficiently.

7. Keep Up with Tax Changes

Tax laws change frequently, and certain deductions or tax credits for freelancers may vary year to year. Following reputable financial resources or consulting a tax professional annually can help you stay informed and compliant.

The Bottom Line.

Regularly tracking your income, setting aside funds for taxes, and taking full advantage of deductions will put you in control of your financial health and set you up for a smooth tax season.

Meet Debbie 💚

Debbie is where you start your journey to financial freedom. It’s the program that guides, motivates, and rewards you for paying off debt and saving! Debbie users have paid off 3x more debt than the average borrower, as well as saved around $100/month on average. Do you want to be part of this elite crowd? 👀 Join now at joindebbie.com to start earning cash rewards now!

‍