The freelance workforce is growing. In the U.S. alone, the freelance economy has reached $1.2 trillion and will keep growing under the influence of the pandemic and remote work trend.
But the pandemic is not the only reason people become freelancers. It’s an excellent opportunity to earn a few bucks for what you love to do and have a flexible work schedule.
Nevertheless, there’s a pinch of salt here, too: freelancers have to pay taxes, and many of them have no idea how to do it properly. As a result, a lack of this expertise can get you into serious trouble.
To help you avoid unnecessary stress, we’ve prepared a few helpful tips on handling taxes for all freelancers.
1. Understand Your Status
First-time freelancers often don’t understand the nature of their position. Are you an independent contractor? Or are you self-employed? Let’s figure it out.
As a freelancer, you are self-employed but not necessarily committed to a third party. A self-employed person doesn’t qualify for employee taxes.
An independent contractor is a self-employed person that supplies a third party with goods or provides services. You can be an independent contractor as a freelancer if you have a contract with another business.
So, basically, there is no difference other than in the nature of the work you do. You can register as a self-employed individual or an independent contractor and pay taxes as such. But if you work full-time somewhere, you are considered an employee, and it’s a whole other story.
2. Keep Your Invoices and Other Expenses Organized
With taxes, you have to be prepared for everything. It’s normal if the IRS comes to check with you. And, to remain calm in this situation, you need to have all your invoices and receipts organized.
It’s a common invoicing mistake among freelancers to keep their expenses in disarray. But you don’t need this grief – even if the IRS doesn’t ask for your invoices and confirmation of other expenses, keeping them organized helps you handle taxes better.
Besides, it’s not that difficult – all you need is a separate folder on your desktop.
3. Cover the Basics
There are a few essentials you need to know about taxes, especially if you’re just starting as a freelancer. Let’s quickly cover them.
How much do you have to pay?
As a self-employed individual, you will have to pay 15.3% tax, 12.4% out of which goes to social security, and 2.9% for hospital insurance (Medicare).
When to pay a self-employment tax?
According to the IRS, all self-employed individuals have to pay their taxes quarterly.
Which forms do you have to fill out?
Your go-to tax form is Schedule SE (form 1040). In addition, each client who pays you more than $600 has to give you a 1099 MISC form, which you will attach to the 1040 form to file for the tax return.
Note: keep an eye on the IRS’s website for the tax for revisions.
4. Take Advantage of Tech
Does handling taxes seem too difficult for you?
Indeed, it can be very frustrating, especially if you’ve never dealt with this before. But thanks to technology, you don’t have to stress about taxes.
There are plenty of tax apps for freelancers you can take advantage of. For instance, Freshbooks will remind you of every tax due date. Wave App will inform you of any deductibles you qualify for.
Apart from that, apps are great for organizing all your invoices and expenses. As a result, you’ll have all your tax information in one place, and you can retrieve it whenever you need it.
Wrapping Up
It will take you a while until you figure out how to handle taxes as a freelancer. But you have to start from the basics, and that’s what we explained to you today.
So, let’s wrap up our main points:
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figure out your status (self-employed individuals pay different taxes than employees)
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keep your invoices organized
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know, how much you have to pay, when, and which forms you have to fill out
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take advantage of apps to handle taxes in time
