Guest Post by Curt Nadeau, CPA
While all of your full-time friends are tucked safely in W2 land, you’re scrambling to compile your invoices, expenses, and the countless other materials you’ll need to file your taxes. Freelancers have vastly different tax requirements than full-time employees, and for the uninformed and unprepared, tax time can be the most stressful time of the year. Knowing what to keep, when to pay, and how much to deduct isn’t easy. Fortunately, a little planning goes a long way.
The Must-Know Tax Tips for Freelancers
1. Get organized. Regular recordkeeping is one of the best ways to make tax season less taxing. It’s also helpful for understanding how your business is performing. Hang on to the receipts for business expenditures. Office equipment like printers, computers, and software are easy to remember. But you should also save your phone and internet bills and maintain a written business mileage log for your car.
2. Know what you can deduct. Freelancers can deduct almost any legitimate business expense. In addition to the items listed above, freelancers can claim deductions for professional services, licenses, seminars, and more. However, be careful with travel, meals, and entertainment. Be sure to document the purpose of the expense, and only deduct the business portion of your expenses when you travel. For a downloadable checklist of possible deductions for freelancers, visit my website.
3. Know the home office deduction. Freelancers can deduct a portion of their living expenses (rent, mortgage interest, taxes, and utilities), as long as they maintain a dedicated space in their home that’s used exclusively as the main place of business. This usually means a room designated as a home office.
4. Report your total income. You’re not just required to report what’s on your 1099s. You need to report all cash payments, checks, payments through PayPal, or any other income for your services, both at home and abroad (the IRS calls this “worldwide income“). Failure to report your total income may result in not only owing taxes on the unreported amount, but interest and penalties, as well.
5. Work with your accountant to set-up quarterly estimated self-employment tax payments. No, you can’t just pay in one lump sum on April 15. The IRS — and each state you work in, as long as it has an income tax — requires you to pay regular self-employment taxes each quarter. These are due in April, June, September, and January. Your accountant can help you calculate and file these. Underpaying or missing deadlines will lead to penalties and interest.
6. Stop procrastinating. Tax Day (April 15 for individuals and partnerships, March 15 for corporations) will be here before you know it. Requesting an extension to file your returns doesn’t give you an extension to pay what you owe. Penalties, fines, and interest start accruing on Tax Day.
Curt Nadeau is a Certified Public Accountant. He’s been in accounting, finance, and tax-related fields for over 20 years, and he’s been working with small businesses and freelancers since 2008. Visit his website at NadeauCPA.com.