Being self-employed is blissfully freeing. However, doing your taxes may become complicated especially if you have more than one source of income. When you are a freelancer or a remote worker, chances are you earn income from different sources, but for purposes of filing taxes, your category is considered self-employment.
Freelancers need 1099-MISC forms. There should be one for every source of income or client. This form allows you to report all the payments you received from a client within a year of service. But the 1099-MISC form is usually filled out if a client pays you more than $600 in a single year. For less than that, the form is not necessary but you still have to report the income.
An advantage to being self-employed or filing the 1099-WISC is the flexibility. Self-employed people have flexible working hours unless they are committed to a client. In the same manner, they have flexibility in taking advantage of tax deductions that are related to the taxpayer’s profession.
However, there is also a big disadvantage when it comes to tax time. Freelancers are required to pay the self-employment tax rate of about 15.3 percent. So it’s really a situation of you win some, you lose some. But it’s not like employees don’t pay something like this, because they do. But as employees, the amount is directly deducted from their paycheck representing Social Security and Medicare taxes. But as a self-employed taxpayer, the 15 percent just sound a bit much, although, part of the percentage will be shouldered by the client as a freelancers “employer.”
Tips for filing taxes as freelancers and remote worker
Report all sources of income
The 1099-MISC form is usually for earnings of $600 or more. But this doesn’t mean that you are not obligated to report earnings that are below $600 because you are. Even if you receive your pay through a third party, you are still obligated to report your income. You don’t want the Internal Revenue Service to suspect you and cause the department to call for an audit against you. Audits don’t happen too often, but you don’t want this kind of hassle in the business. So it’s best to just avoid it by following the tax rules. Business may suffer if you are not focused on running it because you have tax issues to resolve.
Track transportation expenses
When you are self-employed, it is understood that you use transportation to run your business, even if your business doesn’t have anything to do with transportations. You could have used your personal ride to meet with clients or haul supplies—these could be written off in your tax due. You can claim deductions on this including other fees like toll or parking dues. This is why it’s very helpful if you keep all receipts. It would be so much easier to track down.
Track home office expenses
Keeping receipts don’t just refer to transportation, it also includes all supplies used in running or operating your business. It also includes “office space.” If you are self-employed, there’s a great possibility that you run your business in the confines of the house. That part of the house becomes your home office. As such, you are allowed to deduct part of your real estate tax in consideration for that so-called home office. Other expenses that could be deducted in your taxes are rent, insurance, utilities and repairs, among others.
Deduct expenses from business trips
Deductible transportation expenses also refer to plane fares—that is if you flew to another state in order to have a business meeting. You can actually deduct the entire flight cost for business-related trips. Of course, when you are in another state, it is expected that you pay for board and lodging. Again, you have to save your receipts for tax season. Half of your meals—only during the days you were actually doing business—will also be deducted from your tax.
Save money for the rainy day a.k.a. tax day
If you are in the habit of saving money for emergency cases, just bulk it up a bit for your tax. When you are an employee, chances are your employer will withhold the tax for you. You don’t have this privilege when you are self-employed so you have to withhold the tax yourself. You can do it through savings. You may also make quarterly payments by estimated how much tax you’d owe the IRS within a year. Anyway, if you pay more than what is required of you, the IRS always returns the money through a tax refund. Take time to regular track or monitor your income. Don’t wait for tax season to do this because too many numbers and too many receipts will surely give you a headache.
Know what expenses are deductible
Three major expenses have been mentioned above as deductible: transportation, home office and business trips. Still, there are more, like, when you give some money to charity—this could be deducted to your tax as well. But you have to be careful though. The IRS already know that this privilege is prone to abuse so the government is quite prudent in making sure that the charity is legitimate and the transaction legal. So make sure you choose the appropriate charity and get the proper documentation. Know more about tax deductions from the IRS or consult with tax experts. This way, you could truly take advantage of your right as a taxpayer.
Categorize business expenses
Some freelancers, who make a lot of money, may plan to run their own business.
It cannot be emphasized enough that if you are running a business, you should really keep your receipts. No matter how small the receipt, it could make a difference in terms of tax deductions. But more than just collecting receipts, you have to categorize them so that the deductible expenses are easier to track. By the way, there are apps that could help you categorize your business expenses, some of them are QuickBooks, Quicken and Mint.
Doing your tax return should not be limited to the tax season—especially if you are self-employed. You have to constantly be in the loop over tax matters so you could do them in instalment basis. By doing so, you are making things easier for you during tax season. This means that throughout the year, you have to also keep track of what deductions you are eligible for. The first part of that is the “knowing.” So, identify these and keep track of all your expenses. Keep tabs on which expenses are deductible so you can estimate your tax due for the year. This way, you can easily prepare the amount and pay for it quarterly so it will be easier on the pocket, hence, better manage your expenses.
Four steps to calculate your self-employment tax
Get a 1040 form
The form is used by every taxpayer to file an income tax. The form just basically asks for your basic information. It doesn’t contain the actual numbers for self-employment tax. However, it does contain important calculations for deductions of your self-employment tax.
Identify actual earnings that are taxable
Not all of your earnings will be taxable. You are allowed to take away 7.65 percent of your entire earnings to signify the employer part of the Federal Insurance Contributions Act—that is if you were paid as an employee of a client. The rest will be taxable.
Calculate the amount of your self-employment tax
Take 15.3 percent of the remaining 92.35 percent of your earnings to know your self-employment tax.
Report half of the self-employment tax as an adjustment
In order to lessen your tax further, you may report half of your self-employment tax as an adjustment to the gross income. Again, this is like the employer part of the equation if you were an employee. Anyway, it sounds almost the same since for self-employed individuals, they receive payment from a client much like an employee receives the same from an employer.
It pays when you are aware of your tax obligations as well. This will help you prepare for tax and for the amount you will be obliged to pay. It also helps that you know how to calculate your own tax obligation. And here’s one thing you should know: mid-year tax planning is a thing. It’s best to always prepare a way before tax season.
Planning is even more important because of certain changes implemented from the Tax Cuts and Jobs Act. Among the changes implemented are the itemized deductions and an overhaul of the withholding tax rules on wages. The form will also be different—smaller, just about half the current size. More than the size, the form is also more simplified.
Some things that will help you in filing your taxes:
Review your filing status
Status here refers to your legal standing—are you single or married? Are you single now but are planning to get married within the tax year? This is something you need to take into consideration when filing your tax return because your legal standing has some direct effect on your tax.
Review your past tax return
Go over your most recent tax return and learn from the mistakes you’ve made. There must have been areas there that made you stumble, at least now you know what to do and it will be easier. Knowing your mistakes will help take away the stress for this year’s tax filing.
Set up a filing system
Documentation is very important. So start a filing system that will help you organize your papers—receipts and other important tax papers. Don’t wait until January to start filing papers for tax filing. When you are organized, it’s so much easier to file your tax return. Documentation and organization of papers will also help you with your tax deductions.
Track donations to charity
Doing good actually gives you some tax relief. When you donate to charity, you are expected to enjoy some deductions. So document your donations and keep the receipts to fully enjoy your tax advantage.
Familiarize yourself with the new tax rules
As mentioned, there are changes in the filing of 2018 tax returns. Start learning these changes to make filing your next tax return fairly easy.
Freelancers and remote workers don’t always have it easy. There is always a risk that business will not be good. But no matter how terrible the business gets, they still need to pay taxes. Well, that is unless the taxpayer actually earns less than $400 a year. That’s a very low income for one year so perhaps a tax break is necessary. A business loss also makes a self-employed person eligible to file a lower tax rate.
Being alone in the business is also not a “good enough” excuse not to do your tax. Some might think that being self-employed means you own your time and that you can decide whether you file your income tax return or not, or pay your tax or not. It’s non-negotiable. Taxes are the government’s blood—it gives the nation life. It is only through taxes that there are infrastructure and social services. So, of course, the IRS will make sure people are actually doing their part for the government and the nation.
For self-employed individuals, it is important that you are aware that the consequences are worse for you if you don’t pay taxes. This is because you have to take care of everything. If the IRS will audit you, then you have to take care of that—as a result, you might lose focus on your business. When you are a freelancer, it is important that you have your head in the game since there is no team to take care of the business. Self-employed people have more at stake when it comes to filing the appropriate tax return.