Whether you are wholly self-employed or moonlight as an independent contractor, there are quite a few steps to remember when filing your taxes. In addition to annual returns, most freelancers must make quarterly estimated tax payments, depending on the amount of freelance income earned. Most self-employed individuals choose to set aside a portion of their income to prepare for estimated tax payments. Remember, self-employed people are often taxed at a higher rate than company employees, because they are accountable for their full share of payroll taxes. If you have numerous clients, variable income, and complex expenses, you might consider hiring a professional to file for you. But with careful research, planning, and record keeping, it is completely feasible for freelancers to file their own taxes.
If your household income is less than $60,000, you should be eligible to file for free with MyFreeTaxes.com. MyFreeTaxes uses H&R Block software to provide free online tax assistance, including all the necessary forms for self-employed individuals. Taxpayers can also file up to three state returns at no cost. MyFreeTaxes offers assistance via live chat support on its website and over the phone. The IRS provides a list of free online filing options as well, but each company sets its own eligibility criteria, and many of them only offer the federal 1040 or 1040-EZ form at no cost. Free tax preparation services for freelancers and other taxpayers are also available in-person through the VITA program.
If you don’t meet the income requirements to get free tax help, purchasing software through a company such as TurboTax or H&R Block is an option that will probably be more affordable than hiring a tax preparer or accountant. Tax software can be a useful tool to help translate some of the difficult language on IRS forms and allow for straightforward online filing. Just be sure that you choose the right software package for your needs, which may change year to year. Many freelancers who were able to file with TurboTax’s “Deluxe” package last year now must upgrade to the “Home and Business” package. Once you have determined the package that fits your needs, you could even receive a large discount by purchasing your software over the phone.
If you decide to file on your own, calling the IRS or state tax centers with questions can be tremendously helpful to DIY tax preparers. The IRS website is one of the most reliable resources for tax help. Try visiting its “Self-Employed Individuals Tax Center.” The Nolo website can be helpful to freelancers as well. Nolo’s book Working for Yourself by Stephen Fishman is a useful resource, particularly for small business owners, whose taxes are even more complex.
Accurate recordkeeping and organization are essentials for every freelancer. Keep track of all income and business expenses, and keep receipts for all expenses you will be reporting. Do extensive research and educate yourself early in the year, as you will likely owe quarterly estimated tax payments. Here are the tax basics you need to know if you have earned income as a freelancer.
1. Quarterly estimated taxes
Generally, individuals who receive self-employment income must make estimated tax payments quarterly. If you wait until you file annual returns to pay taxes on freelance income, you are likely to be charged a penalty in addition to the taxes you owe. The federal due dates for estimated tax payments this year are April 15, June 15, September 15, and January 15, 2016. To determine the amount you owe federally, fill out the 1040-ES form. You are also likely to owe estimated tax payments at the state level. Remember, even if you have clients based in other states, you only need to file in the state where you reside while earning the freelance income. States have their own estimated tax worksheets to help determine your payments. You can make your federal payments online, but some states require you to make your payments through the mail.
2. Annual tax returns
When it’s time to file your annual taxes, you will need to file both federally and at the state level (assuming you live in a state that taxes income). If you have lived in multiple states, make sure you have kept records of how much income you earned while living in each particular state. Be sure to research all the necessary forms you’ll need to file for your specific state. Before you start your annual return, be on the lookout for any W-2 statements or 1099-MISC forms you expect to receive, as these are due to employees/contractors by January 31.
If you are a part-time freelancer and received wages from an employer as well, that income should be reported on your federal 1040 form. Independent contractors also must fill out a Schedule C and a Schedule SE. If your expenses are $5,000 or less, you may be able to file Schedule C-EZ instead of the Schedule C. To find out if you can use the Schedule C-EZ, see the instructions in the Schedule C-EZ form. The Schedule SE is used figure the amount of self-employment tax owed.
3. Deducting business expenses
Tax deductible expenses for freelancers can include computers and electronics, software, office supplies, meals with clients, travel expenses, memberships/subscriptions, reference materials, business cards, and more. If you pay for your own health insurance, you can deduct the full cost on your 1040 as a personal expense. If you work from home, you may qualify for the home office deduction, which is available to both homeowners and renters. The home office deduction allows home-based workers to deduct rent, mortgage interest, insurance, utilities, repairs, and other expenses.