5 Tips to Make Filing Taxes Easier for Freelancers in 2023
Becoming your own boss can change your life for the better. It can also make things more complicated when it comes to filing taxes. There are multiple tax tips out there. As a freelancer, it’s essential to ensure you know what to expect, so you don’t accidentally wind up with a huge tax bill.
The tax code seems to change every year. So, keeping up with all of the new rules about standard deductions, tax credits and other requirements can make anyone’s head spin, especially if it affects how much you have to pay.
Keep reading for tips for how to do taxes as a freelancer and make filing this year a little easier.
Self-employment and freelance taxes
As a freelancer, you’re considered both the employee and employer, so you’re responsible for both portions of the tax bill. The IRS considers freelancers to be self-employed. While you can claim a few more deductions than a regular employee, you are also responsible for all the taxes.
In addition to the regular income tax we’re all used to paying, self-employed people and freelancers are also responsible for paying the portion of taxes that a traditional employer would cover. For 2022, freelancers will pay 15.3% in FICA taxes, which contribute to Social Security and Medicare. Typically, the employee and employer split those taxes, but it’s all on your shoulders when you’re a freelancer.
Keep track of your income
It’s hard to talk about taxes without talking about income. With a traditional job, all you need to file your taxes is your W-2 tax form at the end of the year, showing what you made and how much you had withheld for federal and state taxes.
With freelancing, you’ll likely have multiple clients, each sending you a 1099-NEC form (previously a 1099-MISC) showing what they paid you. If you received payments from a service like PayPal, you’d likely see a 1099-K form.
Don’t just set these aside and forget about them. Your client will also send a copy of the 1099-NEC to the IRS, so reporting every dollar is vital. Even if a client doesn’t send you a tax form, reporting the income is still important. Proving that you paid taxes on all of your freelance income, not just what was reported, can be helpful if you’re ever audited.
Do you have multiple clients or receive numerous payments throughout the year? Consider keeping a spreadsheet with key details like the client name, project title, how much you were paid, and how much you set aside for taxes. This makes it easier to follow up on any outstanding invoices. It is also an excellent way to track how much you make throughout the year.
Deductions for freelance taxes
One of the benefits of starting a business is the tax deductions you’re allowed to take. Generally, the expenses involved in operating your business or side hustle can be tax-deductible. But the IRS has many rules about when and how you qualify for a deduction.
According to Intuit, the maker of TurboTax, freelancers can often take tax deductions on things like:
- Travel and lodging expenses if you travel to see clients, attend a business-related conference or other costs necessary to develop your business
- Education and certifications that help your business grow
- Office expenses like rent or the home office deduction, which offers a deduction based on the dedicated space you use to work on your side hustle
- Internet and phone expenses as it relates to your freelance or side hustle work
- Necessary equipment or materials for your business
To qualify as a legitimate deduction, the expense has to be ordinary and necessary for running your business. So you can’t just go on vacation or buy a new car and claim it as a deductible business expense. Consult with an accountant or tax preparer to ensure you get all the deductions you qualify for.
Five tips to make freelance taxes easier
These tips for freelancers can help you prepare for filing your taxes and help you manage your money better throughout the year.
1. Make a plan for estimated tax payments
Taxes are a pay-as-you-go system in the U.S. Most people have taxes deducted from their monthly or bi-weekly paychecks. Since your side hustle or freelance work likely doesn’t have taxes withheld, you need to make quarterly estimated tax payments to the IRS.
To make those payments easier, make a plan and set aside a certain percentage for your monthly taxes.
Start by reviewing your tax bill from last year and add a buffer to account for any additional income you’ll earn this year. For example, if your tax bill on your freelancing income was $8,000, add an extra cushion based on what you think you’ll be earning above that amount this year. For this example, let’s use $2,000.
Then, divide that total by 12 to get your estimated monthly tax payment. If you anticipate your annual tax bill will be $10,000, divide $10,000 by 12 for a monthly tax amount of $833.33. Set that amount aside every month so you know that you’re prepared.
Don’t forget that you must also set aside money for state taxes, if applicable to where you live.
Freelancers generally make estimated tax payments every quarter instead of every month. Keep your monthly tax payment in a high-yield savings account until it’s time to send it to the IRS.
2. Have separate accounts
Keeping your personal and business bank accounts separate is a good practice. That way, you don’t have to worry about your grocery expenses getting mixed up with your office rent come tax time.
If you work with an accountant, having everything for your business separate from your personal life can also make it easier for them. With one look through your bank statements or accounting software, the accountant can see what came in and went out at any given time without wading through your personal transactions. Keeping accounts separate might also help protect your personal assets if your business is sued or dissolved.
3. Keep good records
The easiest way to make your taxes go smoothly as a freelancer is to keep good records throughout the year. Staying organized can help you find specific items quickly and easily. If you use an accountant to prepare your taxes, clear and labeled records can make it easier for them.
Consider using a physical folder or storage box for paper copies and keeping a digital, encrypted folder on your computer or in the cloud as a backup. If you have a physical receipt or other business paperwork, take a photo and upload it to your computer folder or the cloud for future reference. This way, you can label or tag a file or email, making searching for a specific transaction or dollar amount easier.
4. Save for retirement
When trying to get a business off the ground or earn enough to cover your monthly bills, saving for retirement might seem like a luxury you can’t afford. Don’t let the magic of compound interest pass you by, even if you can only manage to set aside a little bit for retirement every month. Every dollar counts. Plus, contributing to your retirement can also help reduce your tax bill since some retirement contributions are tax deductible.
To maximize your retirement savings as a freelancer, consider opening a Simplified Employee Pension, or SEP IRA, to help you save for retirement.
SEP IRAs are easy to set up, contributions can be tax-deductible, and they have higher income limits than Roth IRAs. For the 2022 tax year, the contribution limit on a SEP IRA is either $61,000 or up to 25% of your total compensation, whichever is less, while the limit on a Roth IRA is $6,000 (or $7,000 if you’re over age 50).
5. Get some help
Preparing your taxes yourself is cheaper. But, as a freelancer, having someone who knows what they’re doing take care of your taxes can help you avoid added stress. While using tax software might work well for a traditional W-2 with the standard deductions, for multiple 1099-NEC forms and business deductions, you might need to speak with a professional.
Finding an accountant who understands your situation can be invaluable and provide peace of mind that your taxes were done correctly.
Bottom line of freelancer taxes
Doing your taxes as a freelancer can be intimidating, especially if you’re just starting or confused about what deductions you do or don’t qualify for. Working with a professional might not be cheaper, but it can help you breathe easier during tax season.
Keep your business and personal finances separate, plan for your quarterly tax payments and keep good records to help you keep your finances in order all year.
Photo by Prostock-studio/Shutterstock
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