If there’s any drawback to working as a freelancer or as an independent contractor, it’s doing your taxes. Unlike being employed in a company, freelancers have to track their income, calculate their taxes, and make payments themselves. Here are a few tips on how you can make paying taxes a less stressful and confusing affair.
If you are an independent contractor, meaning you work your own hours and at your own terms and fully control work processes and client relationships, you fall under the category of self-employed taxpayers. Freelancers, sole proprietors of businesses, and members of partnerships for trade or business all fall under this category. If you’re not sure which category you belong to, you can fill up the IRS Form SS-8 and get someone from the IRS to check and confirm this for you. Otherwise, you can proceed to the next step, which is sorting your 1099 forms.
Your 1099 forms, also known as “information returns,” are documents that record different types of income you receive from sources other than an employer. If you’re an independent contractor, you will have to collate and organize all your client receipts and invoices for that given tax year. You need these 1099s if you want to claim for expenses on your taxes, like business operations expenses, rent, or health insurance premiums.
Once you get them all sorted out, calculate your expenses against your income. Deduct all your expenses from your income. If you earned less than $400 from your freelance work, you don’t need to file an income report.
Print the forms that you will need from the official IRS website, which usually include the Schedule C (to report money made or lost), Schedule C-EZ (for sole proprietorships, joint ventures, statutory employees), Schedule SE (self-employment tax that goes to Social Security and Medicare), and the standard 1040.
The higher your earnings, the higher your taxes will be. Total all your sales or earnings from the sales of goods and services for the year. Deduct your business expenses (e.g., wages paid to staff, business travel, office supplies, health insurance, accountant fees, etc.), and this will give you the amount you need to pay for taxes for the year.
Paying Your Taxes
Fill out the applicable IRS tax form for the current year. For freelancers, it’s usually the 1040 and the 1040 EZ, if you meet the qualifications and have no dependents. On your payment voucher, write down the total amount of taxes you owe. For freelancers who earn more than $1,000, you have the option to pay your taxes on a quarterly basis. There are two ways to pay your taxes. You can do it via post or the Internet. Should you choose to do it online, you can go to the Electronic Federal Tax Payment System (EFTPS) to enroll an account and make your payment. You will have to pay additional fees for online payments, though.
If you send your payment by post, write a check to the United States Treasury and attach your payment vouchers and applicable forms in an envelope. Mail it to the relevant IRS office in your part of the country. To ease the burden of paying a hefty amount in taxes, try to set aside 25% of what you earn for each project in a special tax savings account or even a cookie jar where you can keep your tax money. (Make sure you don’t spend it, though.) This way, when it’s time to pay your taxes, you won’t feel the pain in your wallet or the hole in your bank account.