Top 5 Tax Tips For Freelancers
All year long you basked in the freedom of working from home, at your local coffee shop, or while lounging on the beach. You got to choose your projects, clients, and fees. You went on vacation without having to ask permission from anyone. But now that April 15th is just around the corner, there are many freelance tax issues you need to be aware of—not just to appease the IRS, but also to cut your tax bill as much as possible.
Between all the 1099-MISCs you’ll receive, Schedules you must fill out, and expenses to deduct, tax season can be very overwhelming. For more complicated situations, it may be best to hire a freelance-savvy accountant, but even so (or if you’re doing your own taxes), it’s still worth it to know some of the top tax tips for freelancers:
Tip 1: File Your Taxes Quarterly
The IRS requires that freelancers pay estimated quarterly taxes on April 15th, June 15th, September 15th, and January 15th. These quarterly estimates are designed to prevent you from taking a huge tax hit at the end of the year.
If you are a sole proprietor or self-employed individual, you will calculate and file your estimated taxes with form 1040-ES (Estimated Tax for Individuals). If you are a corporation, you will use form 1120-W (Estimated Tax for Corporations). There is no reason to freak out if you haven’t yet paid them. According to IRS rules, you only need to pay taxes quarterly if you:
- are the sole proprietor
- expect to owe at least $1,000 when you file the current year’s tax returns
Now here’s the tricky part: you need to pay at least 90% of your total tax bill through quarterly taxes in order to avoid a penalty. The ability to break the year down into four segments actually makes it easier to estimate what you owe.
You do not need to predict your income for the entire year; you just need to calculate your income from the previous three months and check a tax bracket like this to determine what percentage of that portion of income should be sent to the IRS.
A good rule of thumb is to put 25 percent of each check you receive into a separate bank account right away so that you’re not tempted to spend it and you have all (or at least most) of the money you owe once tax season rolls around.
Tip 2: Don’t Forget To Deduct
When it comes time to provide the IRS with the information they need, be sure to save all receipts or other expense documentation. Freelancers Union states that the most common deductions freelancers tend to overlook are:
- Mileage. Even if you have a home office, you can deduct mileage and gas going to and from meetings.
- Technology. This includes your phone, computer, and any other equipment you use for your business.
- Home office. This is any room, or portion of a room, that you use only for your business.
Other deductions you are entitled to take are:
- Money spent on advertising. Anything you spend on print or online ads, brochures, promotional items with your company’s name on them, business cards, banners, or anything else that gets the name of your business out there.
- All car and truck expenses. Keep everything from gas receipts to proof of how much you pay for upkeep like oil changes, new tires, and repairs.
- Fees and commissions paid to other parties.
- Contract labor. If you ever need to pay another freelancer or independent contractor for their services, save both their invoice and your proof of payment.
- Insurance premiums paid for various types of business insurance, including liability, worker’s compensation, storm, fire, accident, theft, flood, and malpractice.
- Interest paid on any loans you take out to finance your business.
- Legal and professional services.
- Office expenses, including supplies, postage, books, printer paper, pens, materials, and other items used in day-to-day operations.
- Repairs and maintenance to business equipment.
- Supplies, provided you produce a physical product. For example, if you are a florist, this section would include flowers, vases, and other floral-related products.
- Taxes and licenses.
- Utilities, including heating, electricity, gas, water, telephone, and Internet.
Tip 3: Be Your Spouse’s Boss
If you’ve always wanted to boss your spouse around, now is your chance! Hiring your spouse can provide substantial tax benefits, according to TurboTax. Though you can deduct 100 percent of any health insurance premiums you pay for yourself or your family, this will only decrease your income tax but not your self-employment tax because it does not reduce your bottom line income. So a smart way to reduce self-employment tax is to hire your spouse and provide family health insurance coverage to employees.
First you must have a legal contract to prove that your spouse is your full- or part-time employee. Then you set up a Medical Expenses Reimbursement Plan (MERP), have your spouse sign up for the family plan, and have him or her pay all out-of-pocket medical expenses for your family. This allows you, as sole proprietor, to deduct all your family’s medical expenses as legal business deductions (use Schedule C for this).
Tip 4: Avoid Affordable Care Act Penalties
This tax season is the first one in which penalties for not purchasing health care will be applied, so make sure you’re on top of the Affordable Care Act. If you didn’t purchase this insurance in 2014, you will be penalized $95 or 1 percent of your income, whichever is higher. Though you won’t be subject to liens or levies, your penalty will be deducted from any future tax refunds.
Form 1095 is the document that shows your health insurance payments and whether you are eligible to receive the Premium Tax Credit or you must repay the credits you received throughout the year. Be sure to save this document (or 1095-A, -B or -C) for tax filing purposes.
The good news is that if you got your health care coverage via the Marketplace but only for part of 2014, you might qualify for an exemption from any penalties for non-coverage.
Tip 5: Plan For the Future and Save Now
There are two common self-employed retirement plans: Simplified Employee Pension plan (SEP) and a Keogh plan. Biz Filings reports that you can only opt for a Keogh plan if your business is unincorporated (in other words, a sole proprietorship, partnership, or limited liability company).
Why invest in a Keogh plan? Freelancers usually have a higher tax burden than others, so these plans are advantageous because tax is deferred until you withdraw the funds. Another benefit is that your maximum annual contribution for the 2014 tax year is $52,000. Compare that number to the $5,500 cap on IRA contributions—or $6,500 if you were 50 years old by the end of 2014—and you can see why well-paid freelancers find them beneficial.
As a freelancer you have taken on the risk of operating your own business, but having a solid plan can work in your favor. Many lines of tax code were actually written to help soften the blow of operating costs. Take advantage of that fact by claiming every tax deduction for which you qualify.