Determine What Expenses You Can Write Off
When it comes to business expenses, youre allowed to deduct anything that is ordinary and necessary in your industry. If youre unsure what those expenses are, you can reach out to relevant professional associations and ask them. You can also ask an accountant or tax professional what you can expect to write off.
Be wary of writing off expenses that dont meet these criteria. If you write off too many irrelevant or unnecessary costs, youll end up attracting unwanted attention from the IRS.
How Do Freelance Taxes Work
Hello, kiddoes! Today were going to discuss a more serious topic: the topic of taxes. I dont know about you but that word instantly sends a shiver down my spine. Taxes are complicated, confusing, and sometimes even fear-inducing. Recently, however, I have had to get over my fear and start reading a whole lot on how to file individual taxes. I did not get a chance to pick up Freelance Tax for Dummies.
After starting up the Oh Black Betty Agency, I started freelancing and selling in my shop and this has been very fun, but on the other hand it has opened up a whole new world of taxes to me. Normally, when you get employment, you fill out a W-2 and forget about it until tax season comes around and you get your form to submit. However, whenever you go into business for yourself or provide a service, you are considered self-employed or a 1099 contractor respectively. These taxes are a little more involved than your standard W2.
Many of you might be starting your freelancing journey and say Oh wait, what! I have to file freelance taxes? What is that? I decided to share what I have learned to hopefully help you during your own personal journey to break the 9 to 5 rat race.
Perfect For Independent Contractors And Small Businesses
Find more tax deductions so you can keep more of the money you earn with TurboTax Self-Employed.
- Earned Income Tax Credit
- Child tax credits
- Unemployment Income reported on a 1099-G
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Paying A Tax Penalty Doesnt Need To Happen
The first year I needed to pay quarterly estimated taxes, I decided to ignore it until I filed my annual return for my full-time job. However, I always saved some of my freelance income to account for those taxes plus the anticipated penalty for not paying quarterly.
Thats right, I knew Id have to pay a penalty and I still ignored filing quarterly estimated taxes.
This strategy was partly due to another self-employed friend telling me she found the whole thing a hassle. She said paying the penalty was much less painful than the time spent figuring out how much she owed quarterly. I went with that mentality and used the excuse of, my time is worth more and Ill just pay the penalty.
Fortunately for me, the penalty wasnt too painful. But thats only because I was still paying taxes at my full-time job at the time. ;But, in reality, thats not the smartest excuse to use. Looking back now, my tax advice is to take the time to calculate your income and expenses as well as tax deductions and pay your taxes quarterly if you anticipate owing more than $1,000. That way you avoid a large tax bill next tax season and having to scramble to pay it.
What Defines A Verbal Contract
A verbal contract refers to an agreement between two parties that’s made âyou guessed itâ verbally.
Formal contracts, like those between an employee and an employer, are typically written down. However, some professional transactions take place based on verbally agreed terms.
Freelancers are a good example of this. Often, freelancers will take on projects having agreed on the terms and payment via the phone, or an email. Unfortunately, sometimes clients don’t pull through on their agreements, and hardworking freelancers can find themselves out of pocket and wondering whether a legal battle is worth all the hassle.
The main differences between written and oral contracts are that the former is signed and documented, whereas the latter is solely attributed to verbal communication.
Verbal contracts are a bit of a gray area for most people unfamiliar with contract law âwhich is most of us, right?â due to the fact that there’s no physical evidence to support the claims made by the implemented parties.
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When Do You Need To Pay Freelance Taxes
Freelancers who expect to owe $1,000 or more in taxes are required to pay estimated taxes quarterly as well because freelance income is not withheld by employers throughout the year. The IRS Form 1040-ES can help you estimate how much youll owe in taxes each quarter, and its important to get these payments as close to the real number as possible. If you underpay your quarterly taxes, you will owe the IRS the remaining balance when you file your annual tax return by April 15. If you underpay your quarterly taxes too much, you may have to pay an additional fine.
Additionally, freelancers may have to pay state income taxes as well as local taxes.
Calculating Your Estimated Freelance Taxes
Even though you summarize your self-employment earning on your annual return, if you expect to owe more than $1,000 in taxes from freelance income, you are must pay estimated quarterly taxes to the IRS. The deadlines for quarterly tax payments are in April, June, September, and January.;
You can use Form 1040-ES helps you estimate your what your annual taxes will be based on what you expect to earn. If you make less than around $2,000, you can probably skip estimated taxes, but if you arent sure if youll reach that threshold, its best to make quarterly payments in order to avoid fines.
It can be tough to estimate what your annual earnings will be, especially if it is your first year as a freelancer, or if the year will vary from previous years in amount or type of work you are doing. In any case, you should make an attempt to estimate your earnings and expenses, calculate your net taxable income, divide it by four, and pay about 28% of the amount each quarter. The good news is, if you overestimate, youll get money back when you file your return!;
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Prioritize Planning For Retirement
For many freelancers, retirement planning is not a top priority, as they are laser-focused on the day-to-day responsibilities of growing their business and reaching new clients. They may also feel that they have few options since, as sole proprietors, they can’t tap into employer-sponsored retirement accounts.
“One of the biggest misconceptions freelancers have about retirement plans is that they are too costly,” said Kurt Rossi, president and wealth advisor at Independent Wealth Management. “A retirement plan often provides significant net after-tax benefits.”
For a self-employed person or a business owner without any employees other than their spouse, a solo 401 plan can be a good option, suggests Rossi. The plan allows the same contributions as a traditional 401 profit-sharing plan, up to $56,000 or 100% of earned income, whichever is less. The money is tax-deferred until withdrawal.
Simplified Employee Pension IRA plans are another way to save for retirement. A SEP IRA allows you to contribute up to 25% of your net earnings or $56,000, whichever is less.
Traditional and Roth IRAs are among the simplest ways to start saving for retirement as a freelancer. These are ideal for those just starting out, saving less than $6,000 a year or looking to roll over a 401 from a previous job. Withdrawals in retirement are tax-free.
Regardless of which investment option you select, the most important thing is choosing a plan and getting started, according to Rossi.
What If I Dont Get A 1099k From Paypal And I Dont Receive Any 1099s From Clients Do I Still Have To Declare The Income
This depends on a few factors. According to the TurboTax site:
When determining whether you need to file a return, you dont include tax-exempt income. In 2018 for example, if you are under age 65 and single, you must file a tax return if you earn $12,000 or more, which is the 2018 standard deduction for a single taxpayer.
There are years when you are not required to file a tax return but may want to.
For example, if you are a single taxpayer who earns $2,500 during the year, with $300 withheld for federal tax, then you are entitled to a refund for the entire $300 since you earned less than the standard deduction plus one exemption.
The IRS does not automatically issue refunds without a tax return being filed.
I come from the school of, if you make money, file. Most likely, youll be entitled to a refund if your earnings are below the standard deduction and you had expenses.
Advantages of Filing Taxes as a Freelancer Even When You May Not Have To
But more than that: it gets you in the habit of record-keeping; staying aware of your tax responsibility as a freelancer; knowing what your tax bracket is as a biz owner; and keeping abreast of ever-changing tax laws.
This way, once your earnings do reach the stage where you have to file, it wont be such a mystery of a process.
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How To Invoice As A Freelancer In Canada
The thing about being a freelancer is that you have to put together your own invoices to send to clients.
However, Wave does offer free invoicing services to make it a bit easier, and they allow your clients to use credit cards for payments.
If youre looking to do it manually, you can find plenty of great and free self-employed invoice templates on Canva.
You can also sign up for my mailing list below to get a free printable invoice template for self-employed and freelance Canadians!
Heres what you need to include on your invoice as a freelancer:
- Your name or business name
- Your address or business address
- Email address
- The total amount
If you want, you can also add a clause at the end stating any late fees that might incur if invoices are paid late.
Be Prepared For Tax Day
Charles Corsello Jr., a licensed enrolled agent and co-founder of TaxDebtHelp.com, recommends having a , and setting up a dedicated savings account to put aside a certain percentage of each paycheck for tax payments.
“By doing this, it makes it way easier for a freelancer to prepare their tax return by helping them determine profit or loss,” he said. “It also makes it easier to classify expenses when leveraging financial software.”
How much should you set aside? Financial professionals advise putting away about 30% of your total income to pay for taxes.
“In fact, you probably want to withhold closer to 35% if you have high income and you live in a high-taxed state,” added Corsello.
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When Is The Tax Deadline For Freelancers
Freelancers have to pay taxes four times a year:
- Self-employed workers have to pay fourth quarter 2020 estimated taxes by January 15, 2021. Each quarter, freelancers need to file the 1040-ES form.
- Freelancers have to pay first-quarter 2021 estimated taxes7, along with income tax and self-employment tax for the year.
- Deadline for freelancers to pay second-quarter estimated taxes.
- Third-quarter estimated taxes are due.
Should I Be Filing Taxes As A Freelancer
Yes, of course you should. As soon as you start making any side income, youre required to report it to the CRA. Even if youve only made a few hundred dollars, you should still report it as not doing so would be considered tax evasion. Its unlikely the CRA will come after you, but thats not something I would take a chance with.
Theres no legal obligation to register your business as long as youre invoicing under your own name. If you prefer to invoice under your business name, then you are required to register your business name in your province. But to be realistic, your clients will most likely not care how you invoice them as long as they know who theyre paying.
Keep in mind that you need to keep a record of all of your income and expenses that relate to your business. I;use a spreadsheet to track all my income and expenses and keep a small divided folder for paper receipts. Theres also an app available which Ill detail below. Owing taxes is arguably a goal for freelancers since it means youre earning income.
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Don’t Expect A Tax Refund As A Freelancer
There isn’t a person who doesn’t love getting a tax refund. As a freelancer, though, you need to get used to the idea that you are not likely to see one. When you have an employer, your taxes are automatically withheld from your paycheck, and you may get a refund if you overpaid the government throughout the year. This is less likely to happen if you are self-employed, since you are the one sending in the money you owe.
According to Razi, freelancers receive refunds under only two circumstances: They overpaid their quarterly estimated tax payments, or they made such little money for the year that they are entitled to an earned income credit , which is refundable.
“In general, most freelancers that make a decent amount in a year do not qualify for the EIC tax credit,” said Razi.
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Paypal Taxes & Freelancing: Got Questions
Hit me up on . Comments close after 24 hours on each post, so thats the best way to continue the conversation.
Happy filing! And, please share this post if you found it useful. To do it quickly, you can use the social media share buttons provided here.
Disclaimer: I am not an accountant and the information here should not be considered financial or tax-preparation advice.
Every freelancer is different. So please consult a qualified tax professional one knowledgeable with your state/countrys tax laws when filing taxes as a freelancer.
What Is An Annual Self
The;Annual Self-Assessment Return;is a system used by HMRC to collect income tax. It can be filed online or through a paper form, though deadlines differ in each case.
It has to be filed by a very specific deadline, or you will incur in fines. The deadline for paperwork is usually around 31st October, while the one for online returns is;normally 31st January each year. If your business has been affected by the Covid pandemic,;you can request an exception to delay the payment; however keep in mind that HMRC will charge interest on late payments, so if you can pay your taxes in time, please do.
Based on the Self-Assessment Return Form, HMRC will calculate your income tax and what you owe based on a number of factors.
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How Much Taxes Do I Pay On A 1099
In most cases, a freelancer will be considered a 1099 contractor when it comes to taxes. That means youll file a 1099-MISC form at tax time. However, if you form a corporation, such as an LLC, you can avoid 1099 contractor status.
And like I mentioned above, freelancers are considered self-employed by the IRS. Meaning, if you made more than $600 as a freelancer, youll have to pay self-employment tax and file a 1099.
Remember, this tax equates to roughly 15.3%. And your individual income tax bracket based on your income can determine how much cash you need to set aside for taxes. Its smart to set money aside as you earn it because theres a chance youll need to pay estimated taxes every quarter.
To figure out how much youll owe, you can use the Schedule SE form to estimate your freelancer tax. Youll then report this amount on Form 1040 come tax time. Based upon your circumstance, you may even be able to deduct the employer equivalent part of your self-employment tax on your 1040, which equates to up to 50%.
Remember, though, self-employment taxes are NOT based on your gross income. Theyre based on your net income . So at tax time, youll take your gross and subtract any deductions to get to your net income number .