By Elaine Nadalin
If you are a freelancer, you have plenty of company: more than 53 million workers in the U.S. identify as either full-time or part-time freelancers. Whether you are a full-time freelancer or freelance on the side in addition to a full-time job, getting through your first tax year as a freelancer can be challenging unless you prepare in advance and stay organized throughout the year. Here are some tips to get you started:
If you have multiple clients, set up income and expense files for each one. Let’s assume you have a landscaping business, and you have three clients to start with. You would set up a paper or software ledger for “Miller: Income/Expenses” and follow the same format for your remaining three clients. You’ll be merging all of your income and expenses data at the end of the year when filing your taxes, but maintaining a separate ledger for each client account will save you many headaches later on.
When you begin working for a client, be sure to ask for a W9 form if they haven’t already provided you with one. If you earn more than $600.00 from any client, they will need to report your earnings to the IRS, using the data from the W9 form. You may also print out a W9 form from the IRS website if your client doesn’t have one for you.
You will need to report any and all earnings to the IRS, regardless of whether or not they are at the $600.00 threshold. At the end of the year, any client for whom you earned more than $600.00 must issue you a 1099-Misc no later than January 31st. Be sure to compare your earnings figures from that client with the figure shown on the 1099-Misc. Discuss any discrepancies with your client or their payroll service.
Track Income and Expenses
Stay organized: Set up an accounting and filing system that you will use. Many of the available accounting software packages available today will automatically categorize your expenses for you as you enter them, and also offer the option for you to manually assign the proper tax categories (“Fixed expense: rent”). Set up a filing system for all receipts related to your business. Enter the receipts into your accounting software (or ledger if you prefer to keep records by hand) and the category.
For receipts for mixed items, such as groceries and business supplies from that huge Target run, take a few seconds and circle the items related to your business. Those ink jet cartridges that cost you a fortune? Find them on the receipt, circle them and note “office supplies” or similar. If it’s an item specifically related to a client account, make a note of that (“Peat moss: Miller”) Make the same notation on your expense records and tuck away the receipt.
If you use your car or truck in the course of conducting business, keep track of all your vehicle-related expenses: fuel, repairs, insurance, registration, and mileage. Keep a mileage log throughout the year, and note which miles are business-related and which miles are personal use. A spiral-bound notebook with categories for dates, account name, and beginning and ending odometer readings is usually enough for most freelancers.
The percentage of your deductible vehicle-related expenses depends on many factors, and it’s best to check with a tax pro regarding your specific vehicle-related expenses. Be sure to document any vehicle-related expense in your accounting records, along with the associated client name. “Mileage: Garcia” seems small now, but it will jog your memory at the end of the year when you are gathering your tax records and filing your return.
If you work from home, you may be able to take the Home Office Deduction. You may be eligible to deduct a percentage of certain expenses such as rent or mortgage, utilities, repairs, security system, and insurance. Be sure to categorize these expenses in your records each month.
Those pesky quarterly taxes: It’s true. They exist. If your net earnings as a freelancer are $400.00 or more, you are required to file a tax return. Most freelancers can use the Schedule C or C-EZ form on their 1040 tax return form. Freelancers are obligated to pay self-employment tax in addition to income tax each year. As a general rule of thumb, quarterly taxes are based on the prior year’s tax return. IRS form 1040-ES includes a worksheet for calculating your estimated taxes. Quarterly taxes cover your contributions to Social Security and Medicare.
Don’t let the thought of taxes scare you out of freelancing. While modern tax prep software can walk you through the tax filing process for freelancers, it’s best to check with a qualified tax pro when starting your business. They can advise you on your specific business scenario, and make recommendations for staying on top of your tax obligations.