In 2019, at least 57 million Americans worked as freelancers. That’s more than a third of the U.S. workforce.
While some people do freelance work to bridge the gap due to a layoff, many people choose the freelance life by choice. It comes with a more flexible schedule and an uncapped earning potential.
It also comes with more challenging taxes to file.
Luckily, filing freelance taxes isn’t as daunting as it may seem. Read on to learn how to handle self-employed taxes so you can protect your business and your income.
1. Think About Hiring a Tax Professional
Freelance taxes can be very complicated, depending on your state and your line of work. If you’re a new freelancer, it’s wise to hire a tax professional.
They can help you file the correct forms, point out deductions, and avoid the headache of filing your own taxes. Plus, they’re up-to-date on the latest tax laws, so you’ll know you’re getting reliable information.
2. Decide What Type of Business Structure You Have
Freelancers can fall under a wide range of business structures. Sole proprietors, LLCs, and S-corps are just a few of the options. The type of structure you have determines what kind of taxes you owe.
If you’re a sole proprietorship, your taxes are connected to your personal tax return. An LLC costs more to set up and you’ll pay more in business taxes, but you might pay less in self-employment tax.
3. Learn How to Estimate Quarterly Taxes
If you think you’ll owe more than $1000 in taxes in a year, you’ll need to pay quarterly taxes. If you don’t pay quarterly taxes and you should have, you’ll need to pay a small penalty.
Your total tax bill will be between 30 and 35% of your total yearly income. Your quarterly tax payments will be your total tax bill, split into 4 payments. If you over or underestimated, you can send in form 1040-ES along with your next estimated payment and file form 2210 with your yearly tax return.
4. Keep Track of All Your Income
As a self-employed person, you’re in charge of your company’s books. That means you have to keep detailed records of all the money that comes in and goes out of your business.
When you file your taxes, you’ll need to report all of your income. While companies that used you as a freelancer should send you a 1099 form, it doesn’t always happen. But, you’re still required to report the income, which is why it’s critical to keep your own records.
One option for tracking your income is to create check stubs online for payroll management. You can track your income to date as well as any taxes you set aside.
5. Don’t Put It Off
Filing freelance taxes is stressful, which is why many people procrastinate. But, that will only make things more difficult.
Experts suggest freelancers think about tax-related information every day. That means updating your income records and organizing expense receipts. The more you do in advance, the better you’ll feel when April rolls around.
Filing Freelance Taxes Doesn’t Have to Be Hard
Between tax forms and deductions, filing freelance taxes can be tough. If you reach out to a tax professional for guidance, keep good records, and plan ahead, filing self-employed taxes is doable.
To learn more about running a business, keep scrolling our blog for other helpful articles.