That is my ninth yr of full-time freelance writing, which I’d wish to say makes me an professional at freelance taxes.
Nevertheless, the reality is that I be taught one thing new yearly — whether or not it’s how a lot to put aside for estimated taxes, what accounting software program I ought to be utilizing or what share of my web invoice counts as a enterprise expense.
I offers you this tip, as somebody who’s been within the freelance tax-paying recreation for some time: the very best factor you are able to do as a freelancer is get a CPA, and the second-best factor you are able to do is ask your CPA questions. Belief me on this one.
Asking the suitable questions can prevent a variety of time and stop you from getting caught with an surprising tax invoice in April.
So let’s dive in. First, we’ll have a look at what inquiries to ask your accountant earlier than tax time, then we’ll have a look at what estimated taxes are and the best way to pay estimated taxes, then we’ll have a look at different continuously requested questions, aka FAQs for freelancer taxes.
Ask these inquiries to your accountant earlier than tax time
Listed below are a few of the questions I want I’d requested my CPA after I first started doing freelance taxes, in addition to a number of objects I wouldn’t have identified about until my CPA had informed me.
Keep in mind that I’m not an accountant, so in order for you actual tax recommendation, it is advisable ask your personal CPA these identical questions:
1. Is there a most popular accounting software program you’d like me to make use of?
Once I began freelancing, I did all of my accounting on a handmade spreadsheet, assisted by a number of Gmail folders labeled “tax deductions,” a field of paper receipts and my financial institution statements. Final yr, I bought a brand new CPA who steered I swap to an ordinary accounting software program. This could make her life simpler, as she wouldn’t need to decipher my spreadsheets — which make excellent sense to me — and he or she thought it’d make my life simpler as nicely.
Seems she was proper.
In the event you aren’t already utilizing a contract accounting software program, it’s value it to attempt one. The Write Life recommends FreshBooks and Harvest, however you also needs to ask your CPA if they’ve a most popular accounting software program.
2. What can — and may’t — I do in my dwelling workplace?
I used to freelance in a studio condo, and my CPA informed me that, since I used the identical small desk for writing, consuming, and watching TV exhibits on my laptop, it didn’t rely as a house workplace.
To say the house workplace deduction, he defined, I needed to have an area reserved just for work.
Once I moved into a bigger condo, I had sufficient house to order a nook for a house workplace.
If you wish to declare the house workplace deduction, discuss to your CPA about what you may and may’t do in that house to ensure it qualifies.
3. Is my laptop computer or telephone a depreciating asset?
Your CPA might ask you about depreciating property, that are bodily objects that lose worth over time.
You’re allowed to deduct a portion of this asset’s price over the lifetime of the asset, which is the sort of assertion that’s difficult sufficient that it is best to actually go away it to your CPA.
However you also needs to ask your CPA in case your laptop computer is a depreciating asset. In the event you use your smartphone for enterprise, or in case you have cameras or microphones for vlogging or podcasting, ask about these too.
Any know-how that you simply use for work and often substitute would possibly rely as a depreciating asset, and get you yet one more tax deduction.
4. What share of my telephone and web payments can I deduct?
In the event you use your own home web for enterprise — and what freelancer doesn’t? — you’re entitled to deduct a share of your web invoice in your taxes. Similar goes on your smartphone invoice.
Relying on what your CPA thinks of your own home workplace, you might also have the ability to deduct a few of your utilities. Ask. Don’t assume your CPA will carry it up.
5. Do I want a enterprise license?
Typically paying federal and state taxes aren’t sufficient. Relying on your small business, you could want a enterprise license, which comes with enterprise taxes. You might also must pay metropolis taxes as nicely.
So ask your CPA whether or not you want a enterprise license. Don’t simply go to your state’s licensing web page, search the licenses, and assume that you simply’re okay since you don’t see a license possibility for “freelance author.”
I pay enterprise taxes to the State of Washington beneath the class “Service and Different Actions; Playing Contests of Probability (lower than $50,000 a yr).” That’s why it is advisable ask knowledgeable about these sorts of issues.
6. What deductions ought to I monitor?
Freelancers are sometimes entitled to extra deductions than we notice, and we deserve to assert all of them. In the event you go to a writers’ conference, for instance, you’ll in all probability have the ability to deduct the price of the convention, the price of the journey, and a share of your meals.
However you gained’t know what you may deduct till you ask. Analysis supplies? Postage? That point you requested one other freelancer for an informational interview and paid for the espresso? What concerning the Lyft you took to interview a supply? Or the mileage, in the event you drove your personal automobile?
There are many potential freelance deductions on the market, so it’s necessary to monitor your bills, even the small ones, and ask your CPA which of those bills it is best to deduct.
Don’t overlook to ask which deductions you would possibly overlook, or which deductions it is best to monitor for subsequent yr’s taxes, like the price of that accounting software program you simply purchased!
Estimated Quarterly Taxes – The What, Why, and How
Everyone knows to file a person tax return by April yearly.
However do you know that as a enterprise proprietor, you’re anticipated to file estimated funds each quarter, as nicely?
It’s true. When you anticipate to owe the federal authorities no less than $1,000 in taxes every year, you’re anticipated to file quarterly taxes all year long.
Why? As a result of the federal government doesn’t need to wait till April to get a lower of what you earn. It needs you to pay as you go, identical to in the event you have been an worker at an organization that withheld taxes out of your paycheck and paid them constantly in your behalf.
Paying quarterly estimated taxes isn’t non-obligatory; in the event you fail to pay up all year long, the federal government might penalize you with curiosity once you file your tax return for not paying sufficient tax.
Submitting quarterly is previous hat for me now, however I bear in mind how I felt about this after I first launched my very own enterprise. I puzzled how on earth new enterprise house owners have been speculated to learn about this! No fairy Godmother exhibits up at your door and says, I see you’re self-employed! Let me stroll you thru your tax necessities.
I used to be lucky to have my accountant dad, who co-authored The Money Guide for Freelance Writers, to coach me. Right here’s what he taught me.
Why it’s important to pay estimated quarterly taxes
Figuring out you’re speculated to do one thing usually isn’t sufficient for sensible enterprise house owners. We need to know why we’re speculated to do it. Plus, understanding the logic behind this will make it simpler to observe by means of.
So right here’s why quarterly tax funds exist. One of many perks of working for another person’s firm is that they pay taxes on behalf of the worker all year long. Every time that worker will get a paycheck, the corporate withholds Social Safety, Medicare and earnings taxes, which implies that cash’s gone earlier than the worker even opens the paycheck.
Because of this, staff typically overlook they’re paying taxes all year long. Even when you recognize these taxes come out of your paycheck, it’s not one thing you suppose a lot about till you file your annual tax return and work out whether or not it’s important to pay extra or obtain a welcome refund.
Right here’s the distinction once you’re self-employed: no firm pays these taxes in your behalf. It’s as much as you to make the funds. And once you achieve this each few months, it’d really feel like a kick within the intestine.
The rationale it hurts a lot is as a result of taxes eat up a good portion of your earnings. Most freelancers who encounter this for the primary time suppose they earned first rate take-home pay in the course of the quarter, solely to understand they need to pay an enormous chunk of these earnings to their federal and state governments.
As a substitute of getting pissed off with taxes, let’s give attention to serving to you perceive when and the best way to pay them, so you may get again to the enjoyable components of working a enterprise.
When are estimated taxes due?
This tends to be one of many greatest questions round quarterly taxes: when are estimated taxes due?
You’re required to file them on the identical schedule every year. (Except, in fact, the federal government delays these deadlines due to a pandemic or another widespread catastrophe, prefer it did in 2020.)
Right here’s the schedule for submitting estimated funds:
- By April 15: to cowl earnings from Jan. 1 – March 31 (Q1)
- By June 15: to cowl earnings from April 1 – Could 31 (Q2)
- By Sep. 15: to cowl earnings from June 1 – Aug. 31 (Q3)
- By Jan. 15: to cowl earnings from Sep. 1 – Dec. 31 (This fall)
The schedule will be complicated as a result of funds aren’t due precisely three months aside. They’re known as “quarterly funds,” however, as you may see, they don’t all cowl a three-month interval.
Nonetheless, due to how these “quarters” are unfold out, it’s OK to consider every cost as protecting three months’ value of tax, if that’s simpler to wrap your head round.
In the midst of this schedule, you’ll even have one other large deadline: tax day on April 15.
In the event you’ve filed a tax return beforehand that features self-employed earnings and used a tax software program like TurboTax, that software program will probably offer you estimated tax cost kinds. It’d even let you know how a lot to pay quarterly, basing these estimates on what you earned the earlier yr.
What ought to I do about estimated taxes if my earnings will increase?
That is the one query I want I had requested sooner.
The primary CPA I labored with checked out my yearly earnings and gave me a set of estimated tax vouchers to make use of on the next yr’s quarterly estimated taxes. I bought 4 accomplished estimated tax kinds, every with an amount of cash that I used to be speculated to pay. All I needed to do was write the checks and drop the estimated tax vouchers within the mail on their respective due dates (or pay on-line).
Nevertheless, I elevated my freelance earnings considerably from the earlier yr to the following. I didn’t notice that meant I used to be paying considerably much less in estimated taxes than I ought to have been paying.
My CPA and I found that, because of my elevated earnings, I owed the IRS a further $5,443.
In case your CPA offers you estimated tax vouchers, ask what it is best to do in case your earnings will increase.
In my case, I began placing apart a share of my earnings to go in direction of estimated taxes, as an alternative of paying a hard and fast quantity on a voucher.
The way to pay estimated taxes
Let’s assume that is your first yr as a freelancer and it is advisable search out quarterly cost kinds for the primary time. You may pay on-line; this IRS website lays out your choices.
You may as well pay through test after downloading this manner on-line: Form 1040-ES.
Whereas I do virtually all my filings on-line lately, I nonetheless pay estimated funds through test, as a result of I’ve a system that works for me. I hold paper kinds for estimated funds in a folder in my workplace, so as soon as it’s time to pay, I don’t have to go looking on-line to seek out the suitable kinds and addresses for the place to ship them. All my paperwork is ready proper in that folder, and I can simply write a test and drop it within the mailbox.
Fearful you’ll overlook to pay estimated taxes? I add reminders for all of those dates on my Google Calendar after I file my tax return every year, so I do know I’ll see the reminder all year long.
How a lot estimated tax must you pay?
How a lot tax you pay depends upon your tax bracket and a number of different components, together with how a lot you may declare in deductions. This will make it troublesome to determine how a lot estimated tax it is best to pay.
However right here’s the excellent news: Estimated tax funds are merely estimates. They’re not anticipated to be excellent. They simply need to be shut sufficient.
Your objective — and what the IRS requires — is to pay both 100% of the estimated tax that may be due in keeping with your earlier yr’s tax return, or 90% of what you truly owe this yr.
To make this easy for you, I want I might say, “put apart 30% of your small business revenue every quarter to pay estimated taxes.”
However you would possibly pay extra, otherwise you would possibly pay much less. Listed below are 3 ways to determine how large a test to jot down every quarter.
1. Ask your accountant
In the event you work with an accountant, you may ask them that can assist you work out how a lot to pay in estimated tax. They’ll stroll you thru it so the end result is predicated in your particular state of affairs.
For many of us, that is one of the best ways to get an correct determine.
2. Use final yr’s tax return as a information
Have a look at your tax return from final yr. In the event you anticipate your earnings to be comparable this yr, work out your effective tax rate.
Since your efficient tax fee isn’t listed in your tax return, right here’s a easy option to calculate it: divide the overall tax you paid final yr by your adjusted gross earnings.
Then use your efficient tax fee to calculate your estimated taxes: multiply your efficient tax fee by this quarter’s revenue.
This isn’t an ideal technique, nevertheless it ought to get you shut sufficient.
3. Depend on IRS kinds
An alternative choice is to make use of the worksheet on IRS Form 1040-ES to determine how a lot you owe.
Spoiler alert: this isn’t straightforward! Even IRS worksheets that should make our lives simpler are typically extremely difficult.
Paying estimated quarterly state and native taxes
Sure, it’s important to pay state earnings tax along with federal earnings tax. Except you reside in a state with no earnings tax.
State earnings tax varies significantly relying on the place you reside, beginning at zero in 9 states. In West Virginia, the place I dwell, it’s about 6.5%. In California it’s greater than 13%.
Whether or not your state collects earnings tax and the way aggressively has an enormous impact on how a lot it is advisable put apart for taxes. The identical goes for native taxes. In the event you dwell in California, which has excessive state tax, or New York Metropolis, which has excessive native tax, you would possibly end up having to place apart 35% to 40% of your earnings for tax. In the event you dwell in Texas, which doesn’t accumulate earnings tax, you would possibly fall on the decrease finish of the spectrum, placing apart 25% or much less of your earnings.
In case your ears perked up after I stated “no earnings tax,” right here’s a listing of 9 states the place that dream is actuality: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. New Hampshire and Tennessee additionally don’t tax wages, however they do tax funding earnings and dividends.
Some individuals who have flexibility over location transfer to states with no earnings tax to maintain extra money of their pocket. It provides up over time!
To determine the best way to file estimated state tax the place you reside, merely google “[your state] estimated tax funds.” That ought to return kinds and directions, together with an choice to pay on-line by means of your state’s division of tax or income web site; keep away from third-party websites that cost you for submitting.
Directions differ by state, however pay your state estimated taxes on the identical schedule as your federal funds. Native tax deadlines are normally completely different than federal and state deadlines.
Methods for protecting estimated tax
Simply since you solely need to pay these taxes 4 occasions every year doesn’t imply it is best to wait till then to consider them. The truth is, in the event you make that mistake, you won’t come up with the money for within the financial institution to cowl your estimated funds.
That’s why many freelancers squirrel away cash for taxes every month. Some freelancers go away that cash sitting of their checking account till it’s time to pay up, whereas others open a separate checking account to gather cash that can ultimately go towards taxes, to maintain them from spending it.
Freelance author Nicole Dieker, for instance, wrote about how she stashes away 20% of her income every month. Why solely 20%? As a result of on the time of writing that submit, she lived in Washington State, which doesn’t have state earnings tax. For this reason it’s so necessary to know your state’s legal guidelines and work them into your monetary technique.
Monetary author Carrie Smith at one level made a daily transfer of 15% to 20% of her earnings right into a separate financial savings account. She even nicknamed the account “Earnings Taxes.”
“The arduous half is vowing to not contact it,” Carrie wrote on her weblog. “However in the event you can keep it up, the following time it’s important to pay your tax invoice, you’ll be glad you place this technique into apply.”
Placing cash apart for estimated taxes, fairly than hoping you’ll have sufficient when it’s time to pay them, is one sensible option to lower your stress whereas working for your self.
FAQs and Errors to Keep away from
- How do I keep away from being audited by the IRS as a freelancer and small enterprise proprietor?
The best possible option to keep away from an IRS audit (or to outlive one in the event you do get audited) is to be trustworthy. In the event you hold good data and report your earnings and bills correctly, you don’t have anything to fret about!
Once more, we extremely advocate hiring a good CPA, who does tax returns for a dwelling. They’ve studied tax legal guidelines, they know the kinds, they usually’ve taken the exams to turn into licensed. They’ll know the ins and outs and ensure issues are carried out proper. On the very least, use good software program like FreshBooks, GetHarvest, Quickbooks, or Turbo Tax.
- What are the most typical tax return errors and pink flags?
Examine your tax return for these 10 IRS pink flags:
- Failure to report all earnings
- Submitting a loss constantly
- Taking the mistaken enterprise deductions
- Too-neat of numbers (rounding every little thing to a whole bunch and 1000’s)
- Incorrectly utilizing the house workplace deduction
- Overstating enterprise leisure and meal prices
- Unbiased contractor vs. worker classifications
- Misclassifying different earnings in case you have a number of jobs
- Very low earnings, aka claiming the earned earnings tax credit score (EITC)
- Mathematical errors
In the event you’re afraid of submitting your taxes due to all these potential pink flags, don’t be. Solely about two p.c of People are audited every year, and most of them have dedicated severe tax errors or are clearly making an attempt to assert extreme, irrelevant deductions.
So long as you retain good data, take solely deductions for which you legitimately qualify, and are cautious to not make a mistake, you’ll be good to go.
Conclusion
Getting a superb CPA is step one in direction of working your freelance enterprise successfully.
Asking the suitable questions — particularly round tax time — is the second.
Do each, and also you’ll in all probability discover that your freelance taxes get simpler yearly.
What questions do you would like you’d requested once you began doing freelance taxes?
Items of this text are excerpts from The Money Guide for Freelance Writers: How to Manage (And Feel Good About) Your Finances.
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