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Being an independent contractor/freelancer means you can often make your own hours, sometimes doing your best work while you sit in your pajamas. Along with this freedom comes a few disadvantages, including taxes that can be a little complicated. Sometimes, unprepared freelancers end up with a hefty tax bill come April. To prevent sticker shock at tax time, follow a few expert tips.
As an independent contractor, you are responsible for both the employee and employer part of the Social Security tax and Medicare tax. This tax law means a higher tax rate than many new freelancers expect. You can deduct the employer part of the tax, which helps to reduce your burden. Still, you need to keep this law in mind so that you can accurately estimate your taxes when it comes time to file. Using one of the top online tax services will help you with this.
Since you are both employer and employee, you need to pay estimated taxes throughout the year, just as your boss did for you when you worked as a “regular” employee. Include the SE tax and pay the IRS on April 15, June 15, September 15, and January 15. If you don’t pay estimated taxes, you may have to pay interest and penalties, raising your tax burden even higher.
This step is important for everyone, but particularly freelancers. Your business expenses need to be accurately reported so that you pay as little tax as possible. Losing receipts and estimating your expenses is a bad idea and puts you at risk of overpaying or underpaying your taxes. In case of an IRS audit, you need to keep all your business receipts for at least three years, longer in some circumstances. Carefully consider whether you need to change your deductions.
As an independent contractor, you will likely receive a number of 1099 forms at the year’s end. However, clients are only required to send them if they paid you at least $600. You need to know who owes you a 1099 and who doesn’t. And remember, the IRS still expects tax payments on amounts under $600, so keep close track of your income.
Being an independent contractor means you have to be on top of your taxes unless you want a cruel surprise on tax day. Keep good records of your income, track your 1099 forms, and make estimated tax payments. Fortunately, you can do all of those things while wearing your jammies by filing online. See our HR Block review and TurboTax review for details on how those services work.