Freelancing has become an attractive means of employment for millions around the globe, providing the flexibility and freedom to choose your own path. However, with this freedom also comes the responsibility of understanding and paying your own taxes.
In this blog article, our tax professionals at Anderson Bradshaw Tax Consulting are breaking down how to determine what you’ll owe, maintain compliance, and minimize your tax burden, sharing actionable strategies along the way.
Understanding the Key Tax Obligations
When embarking on your freelance journey, it’s important to remember that you are responsible for your own tax reporting. To ensure compliance and avoid penalties, you’ll need to understand your tax obligations in detail. Some of the most important considerations include:
- Federal and state tax
- Self-employment tax
- Quarterly tax payments
Federal and State Tax
Freelancers must navigate both federal and state tax landscapes, which vary significantly depending on their location. At the federal level, all income earned by freelancers is subject to income tax, and they must file a Form 1040, adding Schedule C to report profits or losses from their freelance business.
State tax obligations can differ, with some states requiring additional forms or offering different deductions. It’s crucial for freelancers to understand the specifics of their state’s tax regulations to ensure compliance and optimize their tax outcomes.
Self-Employment Tax
Self-employment tax consists of Social Security and Medicare taxes for individuals who work for themselves. This is similar to the payroll tax deducted from the wages of most salaried employees, where both the employee and employer contribute.
However, freelancers must pay both portions, which amounts to a combined rate of 15.3% (12.4% for Social Security and 2.9% for Medicare on net earnings). Fortunately, these taxes are only owed on earnings and can be decreased with deductions.
Quarterly Tax Payments
Freelancers are generally required to make quarterly estimated tax payments if they expect to owe at least $1,000 in federal tax for the year. This system of paying taxes in four installments throughout the year helps manage cash flow and avoids underpayment penalties.
Calculating these payments involves estimating annual earnings and factoring in deductions and credits. Freelancers can use IRS Form 1040-ES to calculate and submit these payments, which are due in April, June, September, and the following January.
Achieving Compliance with Proper Documentation
As you can see, diligence is key when it comes to your finances as a freelancer. Fortunately, through consistent and accurate accounting, you can not only ensure compliance but minimize your tax bill through thorough documentation of your expenses. To do this, keep your receipts and document them throughout the year.
If your freelancing financials include many moving parts, or if you’re just looking for peace of mind when it comes to your tax compliance, consider partnering with a reputable tax consultant. If you are just starting out, or your tax situation isn’t very complex, you can often keep your own books with a simple spreadsheet or software like QuickBooks. At the end of the year, you can simply provide these figures to your tax professional or software, and they’ll determine the necessary filings or applicable credits.
Exploring Credits and Deductions for Freelancers
Navigating the tax landscape involves not only understanding your liabilities but also being aware of potential tax credits and deductions that can minimize your overall tax burden.
Freelancer Tax Credits
Tax credits are direct reductions in the amount of tax you owe, making them particularly valuable for freelancers looking to maximize their savings. For example, the Retirement Savings Contributions Credit (Saver’s Credit) is beneficial for those contributing to retirement plans like SEP IRAs or solo 401(k)s, offering a credit of 10% to 50% of the contribution, depending on income. The Earned Income Tax Credit (EITC) provides a substantial benefit for freelancers with lower incomes, potentially reducing the tax owed or yielding a refund. Freelancers must meet eligibility criteria and maintain accurate records to effectively claim these credits.
Freelancer Tax Deductions
Tax deductions reduce your taxable income, thereby potentially lowering your tax bracket and the amount of tax you owe. Common deductions for freelancers include home office expenses, where a portion of home-related expenses can be deducted if part of your home is used regularly and exclusively for business. Expenses such as internet service, business travel, professional development courses, and necessary equipment or supplies are also deductible. To maximize these deductions, freelancers need to keep detailed records of all business-related expenses, ensuring they can substantiate these claims in the event of an IRS audit.
Seeking Help for Tax Debt Relief as a Freelancer
If you’ve been freelancing for a while without an understanding of your tax obligations, you will likely begin to accrue tax debt. These penalties will quickly compound, but this doesn’t have to be an uphill battle. By seeking consultation from a tax relief consultant as soon as you receive notification of tax debt, you can often work out a solution that’ll save you time and money.
The IRS provides a variety of tax debt relief options for unique situations, and at Anderson Bradshaw, we’ll assess your situation to determine the best course of action. To get started, contact the highly reputable and experienced tax professionals from Anderson Bradshaw Tax Consulting at 877.550.3911 or visit AndersonBradshawTax.com to learn more. With over 32 years of experience, our experts are equipped with the expertise needed to help any situation quickly and efficiently.
