Overview
Freelancing can be a good idea to make some extra cash, but only if you’re aware of the Freelancer tax rules and regulations. In perspective, freelancers have some of the same responsibilities and obligations as any other business when it’s time to pay taxes, from documenting sales to purchasing inventory and many other things. The good news? Unlike traditional 9–5er salary workers who file taxes under standard employment status rules, freelancers have access to tremendous advantages and tax breaks around tax time. Without further ado, here are some essential things to be aware of when filing your taxes returns as a freelancer.
Income
First and foremost, your self-employed income taxes must contain the total income you’ve made from freelance work and any additional income streams. Secondly, you may receive several 1099-NEC forms, (previously 1099-MISC) from clients who use your services. Finally, you will be required to submit a 1099-K if you received any payments via online payment systems such as Cash App or PayPal. These companies must also submit these forms to the IRS (Internal Revenue Service) to confirm your income.
In addition, the 1099-K form came with significant changes that will impact you if your business relies on third-party payment systems like Cash App or PayPal . Beginning on January 1st, 2022, online payments totaling $600 or more were reported to the IRS (Internal Revenue Service) on Form 1099-K by both the original payer and recipient. This is significantly different from the previous reporting requirements of 200 transactions greater than or equal to 20,000. Therefore, check to make sure you have the correct documentation and understand all the updates, regulations, and changes surrounding the use of third-party online payment systems.
Self-employment tax
As a self-employed freelancer, you decide when to start working and when your workday ends. Sounds too good to be true, right? Unfortunately, as we all learned early on in life if it sounds too good to be true, it probably is. So, what’s the catch? In this case, the catch is that all freelancer must pay 15.3% in Self-Employment Tax . The IRS will take out this tax under Social Security and Medicare tax requirements, which every business pays, and every employee has taken out of their check. Therefore, as a freelancer, you are both an employee and an employer, making these things your responsibility.
It’s also a good idea to consult with a tax expert on legal ways to lower your tax liability. As a freelancer, you have more opportunities for tax deductions that are not common within the traditional work environment. These things can help you drastically decrease what you owe by year-end without sacrificing other important aspects of life like health insurance or retirement savings. Explore more to know about tax.
Tax Software and licensed tax advisors
There may still be some things you don’t understand, but that’s fine. A local tax advisor would be happy to help you estimate your tax payout, track your income, explain deductions, and more. It’s also a good idea to use tax software such as TurboTax® or H&R Block® , which have excellent options for self-employed individuals. However, once you fully understand the rules and regulations surrounding self-employed freelancers’ tax filings, you’ll be able to file your taxes independently.
Typical deductions a self-employed freelancer
Here are a few things a self-employed freelancer could write off as business expenses:
- Office Space is probably the most significant deduction you’ll claim as a freelancer. Most of your work will be completed from home – whether you own or rent.
- Health Insurance deduction
- Self-employment deduction
- Phone and Internet service deduction
- Retirement contributions deduction
Deductions will only be permitted if all purchases are necessary and normal within what is required to run.
Home Office Space
For the portions of your home that you use as office space. It’s possible to deduct rent and other expenses from your taxes. Although, there are a few key factors you need to be aware of before doing so. Home office deductions are only permitted when the space in question is used exclusively for self-employment work. Therefore, the living room space you share with a friend or family member will not qualify under IRS Home office deduction guidelines. Even though we all know having an isolated workspace within a home or apartment. You share with friends or family is almost impossible!
Specifics on deductions
Understanding the rules and limitations of reasonable tax deductions is important. For example, you could get a write-off for business travel or your standard office supplies like envelopes, sticky notes, or even pens. However, a few things you can’t write off are vacations, a pet, or a new hat. A general guideline is that if the purchase isn’t directly related to your business. you likely won’t be able to get a tax deduction for said purchase.
Education and Certification
Thinking about going back to school and pursuing higher education? If so, your educational cost could be tax-deductible under a few conditions, which are listed below:
- The education you’re pursuing, whether college, independent classes or any other form of learning, is directly related to your business.
- Any business licensing, registration, or certifications you acquire are directly related to your business.
- Any classes unrelated to your business will not be eligible for a tax deduction.
A quick summary of things to remember
In summary, you don’t have to complicate filing your taxes as a freelance business. First, be aware of your freelance income and understand the required tax forms. Secondly, realize that you are both an employee and an employer as a freelancer. It would be best if you stayed educated on tax fees, regulations, and conditions related to self-employment. Lastly, be aware of deductions, and if you’re not sure. You can always consult a tax professional who can help you get your footing. In conclusion, filing your taxes as a freelancer doesn’t have to be complicated. Knowing is half the battle.
