4 Tips for Freelancers to Avoid Tax Day Surprises
The first April 15 in any freelancer’s career can seem like setting a money management execution date. But even if you’re a newbie to the gigging game, in most cases handling your taxes as a freelancer is only slightly more complicated than handling your personal finances. As long as you mind these key areas, you’ll avoid the most common self-employed tax mistakes.
Keep Deductions On-Point
The key difference between filing taxes as an employee and filing as a self-employed freelancer is that your income isn’t subject to employer withholding, which would normally be automatically deducted from your paychecks to cover social security and Medicare taxes. Instead, what would have been your employment-related taxes are rolled together into a separate “self-employment tax.” The self-employment tax covers your social security and Medicaid taxes, and is assessed in addition to the regular income tax rate.
Most importantly, the self-employment tax applies to your net income after business expenses are deducted. That makes expense deductions the strongest tool for minimizing your tax obligations. Just the same, the IRS has a finely tuned radar when it comes to deduction hijinks from the self-employed, so make sure you’re following the IRS guidelines to the letter.
Documentation Is King
Every single cent you’ve earned and spent throughout the year should be accounted for, with clear documentation to support your case. While this is most important for your deductions, there’s no telling what aspects of your financial landscape might be explored during an audit, so it’s always better to be safe than sorry. Be sure to get a receipt for anything and everything under the sun, and when that isn’t possible, keep your own detailed records in a spreadsheet or budgeting program.
Avoid the Home Office Audit
Claiming expenses for a home office is a red flag for IRS auditors, so only do it when you’re sure you can support the claim. To qualify for deductions, a home office needs to be its own separate space (almost always its own room, or an external structure) that’s used exclusively for business. That means if you work on your laptop in the living room, you’re out of luck. Consult the IRS’ home office guidelines to be sure your setup qualifies.
1099s Don’t Issue Themselves
If you’ve ever held a regular job as an employee, get ready to feel nostalgic for the days when a W-2 magically appeared in your mailbox. Now that you’re self-employed, you need to be issued a 1099 form documenting your income from any client who paid you $600 or more that year. Businesses are required to issue 1099s to freelancers, so if you’re still missing the paperwork from a client come the New Year, don’t be afraid to remind them of their obligations.
Once you’ve carefully reviewed your deductions and organized all the necessary documentation, you’ll be well on your way to avoiding the most common freelancer tax mistakes, and can reap the benefits of your good tax habits in years to come.
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