Navigating Tax Season for the Self-Employed

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How to Handle Tax Season as a Self-Employed Worker

Being self-employed or a freelancer comes with a whole slew of tax laws. Navigating these can become very difficult.

How To Determine Self-Employment

The first step in identifying your tax liability is to determine if you classify as self-employed or not. Even though you have a regular lemonade stand every Friday, that doesn’t mean you earn self-employed income.

The first step in identifying if you are self-employed or not is to look at how you earn money. Do you own your own business? Do you work a side job? If you answered yes to these questions chances are you are self-employed.

You don’t have to own your own business to be self-employed, however. Self-employed workers are people who perform “business-like” activities. These activities include trying to make a product, regularly produce your own income, or work to grow and sustain your business.

What is My Tax Rate?

All independent contractors are required to pay self employment tax. If you’re self-employed your tax rate is very easy to understand.

Self-employed workers are responsible for paying taxes if they earn more than $400 from freelance income in a year. The tax rate for self-employed workers is 15.3%.

While this may seem high, it’s actually only covering Social Security and Medicare taxes. For regular employees, half of these taxes are covered by the employer. Because self-employed workers are both the employer and the employee they are responsible for the whole tax.

Don’t forget, however, that you will still be responsible for income tax. Make sure you have enough set aside to cover taxes on the income generated from your self-employed income.

Setting aside 30-40% is standard for self-employed workers. This ensures that the income tax amount, as well as the self-employment tax, will be covered when taxes are due.

Am I Full-time or Part-time?

Just like regular employees, freelancers and self-employed workers are considered to be either full-time or part-time.

Taxes for Full-time Freelancers

If you expect to pay $1,000 or more in taxes for a given year, you are considered a full-time freelancer. All this means is that you will need to make quarterly tax payments. These payments are estimated based on how much you expect to earn.

In order to accurately figure out how much your estimated tax payments are each quarter, you can rely on Form 1040-ES. This form has instructions on how to estimate your quarterly tax payments so as to avoid paying taxes later.

Payments should be made on January 15th, April 15th, July 15th, and October 15th for the quarter ending in the previous month. At the end of the year, if you have underestimated your taxes you will need to pay off any remaining balance.

Taxes for Part-Time Freelancers

If your freelance business only takes up a small portion of your time, there is good news. Your income is likely too small for you to need to make quarterly payments.

The IRS suggests that if your estimated taxes are less than $1,000 you do not need to make monthly payments.

Most self-employed individuals who have a small side business producing net earnings of less than $2,000 a year will not need to pay estimated taxes.

Speaking with a professional tax preparer can help ensure you correctly classify your self-employed income. It will clear up confusion as to if you need to make monthly payments, and if so for how much.

How Do I Calculate Freelance Taxes?

Each client you work with throughout a year that pays you over $600 should send you a 1099-MISC form. This may not always happen, however. Clients are not required to send you a 1099-MISC unless they paid you over $20,000.

When this happens, you can use a Schedule C form to determine your taxes for the year. Total up all freelance income received and follow the instructions on the form to calculate your tax amount.

Which Tax Forms Should I Use?

There are a lot of tax forms that come into play for freelancers. At first, this can seem intimidating. Knowing which forms a self-employed worker should use is the first step to correctly filing your taxes.

Form 1040

The primary tax form for independent contractors is Form 1040. Similar to W-2s and W-4s, this is where you enter your income, deductions, and credits.

Schedule C Form

As mentioned earlier, form Schedule C is used to determine total income taxes for the year. This form includes information such as expenses and cost of goods sold.

Schedule SE Form

Schedule SE Forms are used to calculate the exact amount of self-employment tax owed for a year. In other words, Schedule SE Forms take care of social security tax and Medicare tax. These should be submitted along with your form Schedule C.

Form 8829

Form 8829 is handy for self-employed workers who use their home as their office. With this form, you can deduct part of your rent or mortgage as a business expense.

Form 4562

Not all freelancers to use Form 4562. This form is used to depreciate expensive equipment. Freelancers such as photographers or graphic designers can depreciate their technology to receive tax breaks.

Depreciation can be tricky, so be sure you understand how you want to depreciate your assets before using this form. The IRS has a handy guide to helping you navigate depreciation of assets.

What Deductions Can I Claim?

It’s important to keep a careful record of business-related expenses when you are a freelancer. Certain expenses can be claimed as deductions on your Schedule C form.

Office Supplies, advertising, equipment, and travel expenses are some of the most common deductions. Other expenses, such as utilities and software, can also be deducted as business expenses.

Another deduction that was passed allows freelancers to claim 20% of their total taxable income. While this may not seem like a lot, 20% can quickly add up to a large sum.

In addition, many freelancers are eligible for the Earned Income Tax Credit because of the low amount they make as contractors.

Being a freelancer is a lot more complicated than it may seem. There are special tax laws for the self-employed. Understanding these laws and how to follow them is important for independent contractors.

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