Whether this is your first go at freelancing, or you’ve been freelancing for years, tax time can be a painful time of year for you. Many new freelancers are unsure or don’t know what they have to do for taxes at the end of the year, so I’m writing this short post as a guide to get you started in the right direction.
First off I hope you kept records of your income and expenses, because it will make this process much easier. As I see it you have two options for preparing your taxes, do it yourself, or pay someone else to do it for you.
Either way there are some basic rules that apply:
- Freelancers without a proper business structure (LLC, Corporation, etc.) will have to file form 1040 schedule C and pay the self-employment taxes (15.3% of your freelance income for social security and medicare just like a real job)
- If you can prove that your freelancing is a business (and not a hobby), you can also claim any additional related expenses. Do you regularly apply for and do freelance work? Do you take freelancing seriously, and plan to make a profit?
- Deductions, Deductions, Deductions! If you can prove that you’re freelancing is more than just a hobby, be prepared to deduct your expenses. Remember, you can deduct just about any business-related expense, including: supplies, gas, books, hardware, software, phone calls, private insurance, and plenty more.
Alright you’re still with me, armed with your income and expense information you’re ready to go it alone and prepare your taxes, so what’s next?
Personally, I recommend Turbo Tax be your next step. Turbo Tax is a really great service that I can’t say enough about, when it comes time to prepare your taxes. Turbo Tax even has a section that can handle your freelance/self-employment taxes, and takes care of filling out form 1040 schedule c for you!
Alright, so you’ve finished your taxes for the year, now what can you do to better prepare for next year?
First things first, make sure that you keep detailed records of your business income and expenses (consider using an accounting program such as Quickbooks – Simple Start is freely available to get you started).
Secondly, as you are tracking your income/expenses, set aside some of your business income to be prepared to pay taxes at the end of the year (or could even make quarterly estimated tax payments).
Last but definitely not least, consider re-organizing your business with a formal business structure (such as an LLC, Partnership, or S-Corporation). Not only can you get some liability protection and seperate your personal and business endeavors, but the added tax benefits/savings are nice too.