Tax Tips for Freelancers

For most people, tax time is a relatively simple time during which they sometimes receive a hefty refund they can spend on a new stereo. For freelancers, tax time can be a confusing and expensive time. With a few simple tips, even a freelancer who is new to the world of taxes can learn to file as a sole proprietor and do their taxes on their own.

Planning

Set money aside for your taxes. Most people have their taxes taken out of their paychecks automatically, but as a freelancer, you are responsible for taking the money out for taxes. The IRS requires freelancers to pay taxes quarterly to avoid fees for underpaid taxes at the end of the year.

Write-offs

Tax write-offs are an important way to reduce how much you owe to the IRS at the end of the tax reporting year. Types of tax write-offs include business expenses, such as computer repair, vehicle mileage to a job, and your home. You cannot write off all of your rent as a business location unless you really use the whole thing for business, but you can write off a fair percentage of your home which is used to conduct the business that you do as a sole proprietor.

Filing Deadlines

Most years, the tax filing deadline is April 17. If April 17 is on a holiday, the filing deadline is the next business day. If your taxes have no chance of being sorted out by the time the due date rolls around, the IRS allows you to request an extension for free, during which time you can gather the rest of your paperwork so you can finish figuring your taxes before the extension deadline.

Learn

Take a class or get an adviser if you don't feel as if you have a good understanding of taxes. Tax mistakes can be costly, so use whatever free information you can to learn more about paying your takes. You can often find a tax service that will teach you to be a tax preparer for free. Even if you don't intend to do work as a tax preparer, the information gained in tax preparation classes give you an invaluable insight into how taxes are done.

Records

Keep good accounting records, because you never know what writeoff will bump you out of a high tax bracket and save you a lot of money. A business checking account is a good step to take to help separate your records so it is easy for the IRS to sort out your tax write-offs.

Self-Employment Tax

Self-employed individuals must pay a 15 percent tax on their net income. The self-employment tax is like the tax that employed individuals pay for social security, but an employer usually pays half of the tax for the employee. Self-employed freelancers can use tax write offs from your business to adjust net income so to avoid overpaying taxes on a net earning figure that is too high.

References:
Freelancing for Dummies (2001) by Susan M. Drake
IRS Small Business and Self-Employed Tax Center