There are different rules for freelancers and you need to know them before filing your taxes. This is one time you don’t want to blindly rely on tax preparation services as failing to follow the rules will cost you dearly.
You Will Have to File a Return
The minimum income a freelancer has to make to file a return is drastically different than someone working for a business. The average American has to make at least $10,300 in gross income before they’re required to file a tax return. If you’re a freelancer, the amount is reduced to just $400. You read that correctly – $400. The reason behind this figure is the dreaded self-employment tax that kicks in on all income earned above $400.
As a freelancer, you will have to file a Schedule C, Profit or Loss from Business, as part of your return. Don’t let this worry you as most of the best tax software apps offer support for freelancers, complete with an easy to follow interview for the Schedule C.
All Income Needs to Be Reported – Even Without 1099’s
Freelancers normally receive a 1099-MISC form from their clients provided they were paid at least $600 or more during the year. Some clients aren’t diligent about issuing these forms, so you may have to contact them and request one.
A copy of every 1099-MISC is sent to the IRS, so if you omit any earnings tied to those forms, the IRS will penalize you. Even if your client doesn’t send a 1099, you’re still responsible to report the correct amount of income. Also, make sure to compare your records to the 1099 forms you receive for accuracy.
Lastly, all income not connected to 1099’s must also be reported. That’s why it is a good idea for you to track all payments.
Self-Employment Tax is Going to Cost You
You now know that self-employment tax kicks in at $400, but do you know how much it will cost you? Freelancers are hit with a 15.3 percent self-employment tax each year. This is the portion of your Social Security and Medicare taxes that would be taken out of your check if you were still receiving a W-2.
This means $153 of every $1,000 you make will go towards self-employment tax in addition to the income tax you pay.
Expenses Will Be Your Friend – But Have Proof
As a freelancer, you are allowed to take business expenses that are ordinary and necessary for the operation of your business. As such, you should be tracking every dime you pay out supporting your freelance business. Everything from office supplies to travel expenses and even equipment like your computer can be deducted as an expense. Even training you take specifically related to your business can be deductible.
Some of you may have heard of the home office deduction for freelancers. In order to take this deduction, the space used for your home office must be used exclusively for your business. You can’t use your kitchen table and write it off as a home office.
These are just some of the deductions you can take. Luckily, the best online tax filing services will give you advice on the types of expenses you can take and may even suggest some you’ve never considered.
Also, keep in mind any expenses you take as a freelancer must be properly supported by documentation. Keep copies of all receipts, purchase orders, bank statements and cancelled checks in the event you’re ever audited by the IRS. Failing to do so will allow them to reject your deductions.