Being a freelancer is, as the name suggests, freeing. You’re your own boss, you get to choose who you work with and when, and you get to pick your hours of operation. It’s a dream come true for many people, but being your own boss does come with certain responsibilities.
Taxes, for example, are up to you. If you’ve worked a traditional job with an employer, you will have grown accustomed to having your tax obligations deducted automatically from your paycheck. As a freelancer, it’s up to you to handle these obligations.
For freelancers, taxes are a constant concern. If this will be your first tax season as a freelancer, the following tips will help you handle it with ease.
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1. Consider Hiring a Tax Accountant
Every transaction matters in the world of a freelancer. You’ll need to keep meticulous records whether you do your taxes yourself or have a tax accountant do them for you. If keeping good records isn’t your strong point, you may want to consider hiring a tax professional. Look for one who specializes in freelance tax laws, so you know you’re in good hands.
2. Know the Basics of Freelance Tax Filing
If you’re a US citizen, and you earn $400 or more in a year from any one employer, you must file a tax return and pay the self-employment tax. The self-employment tax is 15.3 percent, which averages out to the amount an employer deducts from your paycheck for social security and Medicare taxes.
As a freelancer, you may also be required to pay state or local taxes. Furthermore, the IRS requires you to pay estimated quarterly taxes as well. These estimated taxes must be as close to the real amount as possible to avoid paying a large sum at the end of the year.
3. Choose a Legal Business Structure
Your legal business structure can protect your personal finances and define how your freelance business is taxed. Most new freelancers start out as sole proprietors, which uses a Form Schedule C that integrates with your personal taxes.
If and when your business starts earning thousands in net profits, you’ll want to consider changing its legal structure to an S-corp or an LLC. This will protect your personal assets and may qualify you for additional tax breaks.
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4. How to Estimate Your Quarterly Taxes
As an established freelancer who has filed taxes in the past, all you need to do is look at last year’s tax return to get an idea of how much you need to pay in the coming year. If this is your first time filing as a freelancer, it will be a little more difficult to estimate your tax obligation.
The IRS provides Form 1040-ES to help you estimate the amount of taxes you’ll owe. If you underpay or overpay, you’ll either owe or receive a refund when you file your taxes at the end of the year.
Be warned: if you don’t pay at least 90 percent of your tax obligation by December, you could incur an estimated tax penalty.
As a freelancer, you enjoy a lot of perks. From being your own boss to choosing your own hours, many people love the freedom this professional lifestyle provides.
On the other hand, though, you have a whole host of extra obligations, including the tax responsibilities that fall on your shoulders as a freelancer. It’s up to you to pay the government its due. If this is the first time you’ll be filing taxes as a freelancer, follow the advice above to ensure you get it right.
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