6 Tax Tips for Freelancers

December 20, 2010

Image via Flickr user ansik.

What does the date April 15, 2011 mean to you? That's the deadline for filing 2010 taxes. But for freelancers and the self-employed, taxes should be on your mind way ahead of that April deadline. In fact, when there's no employer taking state and federal taxes out of your pay, you need to account for those taxes throughout the year based on income estimates. During the slow workdays between Christmas and New Years' take some time to get receipts and files in order and evaluate your tax-preparedness. Here are some freelance-focused tax tips to help you navigate the world of 1099s, 1040 ES forms, quarterly tax schedules, electronic filing systems and more. 1. Work with an accountant or CPA Do you try to fix your own car? Or do you take it to the mechanic? Don't take any chances when it comes to filing taxes. A tax professional will know all the ins and outs for the state you file in. They can also provide guidance on what you can write off, retirement planning, savings, paying taxes on a quarterly schedule and more. If you get get (gulp) audited, the IRS will give you brownie points for having an accountant prepare your return. You will also need to enlist the accountant's services to help you get through an audit unscathed. 2. Keep records of receipts and bills For the purposes of writing off business expenses such as office supplies, travel, gas and more, you'll need to keep ALL of your receipts. If you have a legitimate home-office setup, then keep copies of the electric bill, Internet and other utilities as well as copies of mortgage or rent payment checks. Get in the habit of asking for receipts or printing out a record of online transactions, such as the purchase of a replacement toner cartridge for a printer. Investing in a simple at home scanner is not a bad idea. This way you can scan receipts and keep them organized digitally instead of in an old-school paper file. 3. Keep detailed records of invoices and payments It's very time consuming, but it's wise to maintain a consistent and detailed record of your outgoing invoices, paid invoices and outstanding invoices. Use a simple Excel spreadsheet and when you bill, develop a system for naming invoice files so they are easy to track chronologically and by client. Do a quick Google search to download a ready-made budget spreadsheet template and invoice templates. Or you can invest in Quickbooks software. For a nominal fee, your accountant will even help you set up Quickbooks for your business. 4. Calculate your home-office space and costs If you work on a corner of the dining room table, then you may not be able to write off your "home office," but if you have a room that is exclusively and regularly used as an office, then you are most likely eligible to write off expenses associated with that space. Basically, if you have 1,000 square feet of space total in your home, and your office is in a 120-square-foot room, then your office takes up 12 percent of the space in your home. Work with your accountant to confirm your calculations and find out which kinds of expenses qualify for write-offs. For example, if you only have one telephone line in your home and use it for business and personal use, then this might not be an expense you can write off for business alone. 5. Estimate and pay taxes on a quarterly schedule When you work for an employer, the employer withholds state and federal taxes throughout the year. When you freelance, if your clients are not taking taxes out of your paychecks, then you need to pay state and federal tax on a quarterly schedule. That's normally April, June, September and January. Ask your accountant about calculating quarterly tax estimates. Visit the self-employed page of the IRS website for related forms and instructions. 6. Apply the new health insurance deduction When you are self-employed you actually have to pay a self-employment tax. In September, President Obama signed the The Small Business Jobs and Credit Act of 2010. As a result, the self-employed can now deduct the cost of health insurance for themselves and their family members when calculating their self-employment taxes. This will reduce the total amount workers owe in self-employment taxes and is expected to provide more than 1.9 billion in tax cuts for the self-employed.

Anonymous's picture
January 07, 2016 03:21 am #

These are great tax tips for any small business or freelancer. Take the time to get your taxes right! It's not worth risking penalties of an audit. I would echo the recommendation to use QuickBooks, and get an accountant to help you set it up right from day one.

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