Working as a freelancer brings many benefits your way, but it may also lead to a dreadful tax season. This is especially true if you have not filed taxes as a freelancer all by yourself before.
But all hope is not lost: By learning a few tips and tricks for filing taxes as a freelancer, you can survive this gauntlet and come out stronger at the other end of tax season.
Interested in learning more? Here’s how you can properly file taxes as a freelancer.
How Do Freelancer Taxes Differ From Regular Employees?
When you enter the world of finances and investments, one of the first things you learn is how regular employees get their taxes withheld all year round. But as a freelancer, you need to allocate this amount yourself as a self-employed individual.
With this, you also need to pay the self-employment tax. You can make these calculations for federal and state taxes in order to regularly set aside an amount for your annual tax bill.
Which Forms Do You Need to Use?
Whether you file your taxes through a tax software that is used by accountants or do them yourself via a mobile app, you need certain forms to report your income. As a freelancer, you have to turn to Form 1099-NEC.
Depending upon the gigs you take up, you may need to use several of these forms. With that, you may also have to fill out Form 1099-K. You can learn more about these forms through the Internal Revenue Service (IRS) website.
How Much Tax Do You Need to Pay?
As a freelancer, you may need to pay certain state taxes and federal taxes. Since you are classified as a self-employed individual, you also need to pay the self-employment tax of 15.3%.
This tax covers your Social Security and Medicare taxes. Similar to using an insurance plan comparison platform to figure out insurance quotes, you can use a financial advice service to determine how much you need to pay in taxes.
Do Freelancers Qualify For Tax Deductions?
Being a freelancer does not stop you from qualifying for certain tax deductions like necessary expenses for your business. But you have to be careful that any transactions that you report as your business expenses are solely spent on your business.
For example, your reported home office expenses should not be used to renovate your general residential space. You can think of this approach as avoiding the most common mistakes during business registration.
Can Freelancers Claim Tax Credits?
In case you qualify for tax credits like the child tax credit, you can claim them to lower the amount of taxes that you owe to the government. Some of these taxes are also refundable and potentially become a part of your tax refund.
You can then deposit this amount in your digital savings account or spend it however you want to use it throughout the year. This makes it important to keep an eye out for applicable tax credits.
Why is it Necessary to Document Everything?
Similar to other self-employed individuals, you need to make sure that you are documenting all of your financial transactions to keep track of your income, expenses, and other costs that keep your business up and running.
This can help you accurately file your taxes at the end of the year. Whether you store your documents manually or digitally, this can also act as one of many proven wealth management strategies for financial success.
Can You Hire Someone to Do Your Taxes?
If you have any experience with using a financial counseling platform in the past, you might be aware of how much support professionals can provide you while navigating through these challenges. This also holds true for tax filing as a freelancer.
In case you find the process to be too overwhelming, you can delegate this responsibility to a professional tax preparer who can manage your tax filing journey for you and keep you updated at every step.
Once you go through this information, you can handle your tax obligations as a freelancer without running into excessive problems. With that, you can continue learning about this topic to make sure you stay up to date with the latest policy changes.