We’re living amid a freelancer revolution.
A 2016 article from Forbes said that freelancers make up 35% of the American workforce.
And with this massive surge of workers receiving 1099 freelancer tax forms in lieu of the traditional W-2, tax season can be a total nightmare if you aren’t prepared.
Many of the tax issues freelancers will face are payment related – the transition to working as a contractor means you don’t have taxes automatically withdrawn from your paycheck.
But knowing when and what to pay throughout the year is just the first step in a very long journey of knowledge, mistakes, and wisdom.
We reached out to tax experts and financial planners to get a list of the best tax tips for freelancers.
The advice we received ranged from obscure to obvious, both of which we gladly accepted because you can never be too straightforward during tax season.
Freelancer Tax Tip #1: Take Advantage of Your Home Office Deduction
The IRS doesn’t mind that you work at home. In fact, they’re giving you an incentive to do it by offering a deduction for any space in your home exclusively devoted to your work.
Don’t mistake deductions for tax credits, though. Deductions are what you use to reduce your income, which reduces the taxes you pay.
So, if you get a $10,000 deduction, it might reduce your tax payment by $1,500. If you get a $10,000 tax credit, it reduces your tax payment by $10,000.
How does the home office deduction work? Measure out your office, calculate the square footage and divide that by the overall square footage of your house or apartment.
Then, take that number and multiply it by the sum of the rent and utilities you pay. The resulting number is your deduction.
What you’re basically doing is figuring out what percentage your office takes up of your home’s square footage, then multiplying that percentage by your rent, utilities and internet payments for the year.
“The biggest help for me as a freelance writer come tax seasons has been my home office,” said Kenneth Burke, a freelance writer for Text Request. “It adds up quickly!”
Pro tip: In order for a room to qualify as a home office, you have to prove the room is regularly and exclusively used for business, and that your office is your principal place of business.
Freelancer Tax Tip #2: Don’t Put Off Your Quarterly Tax Payments
If you’re new to the world of freelancing, you’re going to need to adjust the way you pay your taxes; you’ll need to pay quarterly instead of yearly.
“If you are self-employed as a freelancer, contractor, or home-based entrepreneur you most likely don’t have taxes withheld from your pay throughout the year and are subject to estimated taxes,” CPA and TurboTax expert Lisa Greene-Lewis told us. “In general, you are expected to pay estimated taxes if you expect to owe $1,000 or more for your taxes.”
Normally, your employer would pay half of your FICA, but since you’re technically the boss and the employee, you pay the full 100%. This is known as self-employment tax.
You’ll pay self-employment tax in addition to income tax, but, like we said, it’s not as easy as it used to be. Since your income fluctuates, the IRS wants you to pay your taxes every three months (quarterly) instead of once a year.
Brandon Seymour, the founder of South Florida marketing agency Beymour Consulting, told us he remembered the first year he had to pay his quarterly taxes. Instead of paying every three months, he waited until the year was over.
“I waited until the end of the year to file, and had to give a pretty hefty chunk of my earnings back to the government,” Brandon told us.
A Quick Tip for Quarterly Freelancer Taxes
Nobody likes to stare down a giant number at the end of the year, but that’s what will happen if you put off your tax payments until April.
An easy way to combat this is to create a spreadsheet that helps you understand how much you’re earning. You need to have three columns: months, earnings and taxes.
In the first column, enter the months of the year one-by-one. You should have 12 rows. In the column next to that, enter your income for the corresponding month. In the column next to that, calculate 15% of your earnings for the month and enter the answer.
So, if you earned $4,000 in January, your spreadsheet should look like this:
By the end of each quarter, you’ll know exactly how much you made and how much you’ve saved for taxes. If you’re worried that you might spend money you should be using for taxes, take the amount you set aside for taxes and transfer it to a savings account.
Then, when it comes time to pay quarterly taxes, you can transfer that money back into your checking account and make your estimated payment.
Here are the 2018 deadlines for making your quarterly payments:
- 1st quarter - April 15
- 2nd quarter - June 15
- 3rd quarter - September 15
- 4th quarter - January 15
Pro tip: Need to figure out how much you owe? Use tax form 1040-ES; it helps you calculate what you need to pay. Our 15% suggestion is only meant for the 1st quarter of the year, and then once you do your first estimated payment, you’ll know roughly what percent you’ll need to save for the next quarter. Also, once you know the amount you owe, you can make your payment through the IRS’ website.
Freelancer Tax Tip #3: Keep Meticulous Records of All Business-Related Expenses and Income
Any expert in taxes and freelancing will tell you that what you do during the year is just as important as what you do during tax time.
However, Northwestern University Adjunct Instructor and CPA Curt Mastio says most of us want to sweep the tax conversation under the rug and avoid it all costs. Bad idea.
“The number one golden rule is record keeping. It’s really important,” Curt told us. “I’ve sat down with freelancers and entrepreneurs and asked them how much money they made the previous year and the answer is, ‘I don’t know.’”
As we mentioned in the previous section, part of keeping good records is recording how much you make every month and calculating the amount you need to save for your taxes. However, staying organized goes far beyond that.
You’ve got to keep track of everything you buy for your business, including gear, software subscriptions, and other business-related expenses because can be deducted when you’re doing your taxes.
“Office supplies, from paper to computers – even snacks for customers – may be tax deductible if used exclusively for business,” Lisa Greene-Lewis said.
“And don’t forget your home office furniture. Your desk, your chair, your printer stand, and even your trash can are all able to be deducted on your tax return. Just remember to keep your receipts!”
What’s the best way to keep track of all those random pencil, paper, and office supply purchases? The first step, Curt Mastio said, is opening a business account.
Pro tip: QuickBooks is Curt’s software of choice for keeping track of all your incoming payments and outgoing expenses.
Freelancer Tax Tip #4: Open a Business Checking Account
Think about all the income you earned this past tax year. If you’re like me and you have money coming in from several different sources, it can be really hard to find business purchases and payments amid all the transactions you made in your personal checking account.
By opening a business checking account, you can channel all your payments to that account.
At the end of the year, it will be super easy to find out when and how much you were paid. Your deposits aren’t going to be tucked between payments for groceries, gas, restaurants, medical stuff and whatever else you buy every month.
“Knowing your business expenses and income starts with having a separate business bank account because you don’t want to mix your business and personal funds,” Curt said. “If you have a separate bank account where your business expenses flow in and out of, it makes life easier.”
Of course, opening a checking account for your business means you’ll have to use a debit card or checks to make payments. You might be okay with that, but if you aren’t, try using one credit card for business purchases.
At the end of the year, when it comes time to file taxes online or with your tax professional, you can easily reference your checking account and your business-only credit card to know how much you spent on work expenses like supplies, equipment, business-related miles and subscription services.
“Get your transactions separated and make it easy on yourself and your accountant,” Curt told us. “If you show up to your accountant during tax time and they’re busy, they might charge you more money if you don’t have everything together.”
Pro Tip: Most of your business deductions will go on the Schedule C, something your tax software automatically fills out as you answer questions about various business expenses.
Freelancer Tax Tip #5: Think About Hiring a CPA or Tax Professional
Tax software, in some cases, can only get you so far. Each different tax site sells you on the idea that you can get a huge refund if you use their product.
However, we’ve found those claims to be nothing more than marketing. In an article we wrote about tax filing sites, Chad Shultz, a CPA at Jacksonville-based Startup’s CPA, said the software doesn’t really matter – all of them take the information you give them and spit out the same number.
“I think the average taxpayer’s mentality is that they’re looking to get the biggest possible refund and, that’s fine, but … part of that mentality is that they want to do it as cheaply as possible, too,” said Kristina Grasso, a master tax advisor with H&R Block. “But, sometimes you get incomplete advice, the IRS instructions can be confusing and you’ve caused yourself a little more harm than good.”
Avoiding mistake and making sure you have all your bases covered is part of the reason a CPA is a good idea, the experts told us.
Randall Brody, an enrolled agent (IRS expert, basically) and CEO of Las Vegas-based Tax Samaritan, says freelancers and taxpayers, in general, incorrectly assume tax software gets everything right.
“A common misconception is that tax software will automatically prepare a correct tax return, but that’s only if the preparer understands their tax documents and tax status,” he said. “Tax software is great, as long as you enter the right info, but it’s relying on you to be the tax expert.”
Also valuable is finding a CPA who is as good in tax planning as they are tax preparing.
What you’ll learn is that a successful tax return and maximizing deductions has a lot to do with the financial and organizational choices you make during the entire year and not just April.
“People who own their own business should see a tax professional,” Kristina Grasso told us. “But, remember, it should be someone who is going to be available after tax season ends. It’s a year-round process.”
Pro tip: Choosing the right tax pro is a matter of finding someone you feel super comfortable talking to and who has experience in your areas of need.
Freelancer Tax Tip #6: Make Your Tax Preparer’s Life as Easy as Possible
Put yourself in the place of your tax professional. Would you prefer a shoebox full of receipts or an ordered, sensible series of real or virtual folders?
Dropping your receipts in the proverbial shoebox is a good start, Kristina Grasso says, but it’s not very helpful in the long run.
“Putting everything into a shoebox is admirable, but it makes the sorting out process harder,” she said.
Her recommendation is to start a spreadsheet with one column for months (kind of like the one we mentioned earlier), and then several more for gas, meals, office supplies and other business-related purchases.
At the same time, you’ll want to come up with a way to organize your receipts. You can make your life a lot easier by buying a scanner. Whenever you make a purchase for your business, scan the receipt and save it to your computer or cloud.
At the end of the month, get your receipts and add up your total spend in each spreadsheet category. If you’d like, add up what you spent in each category to get an overall deduction amount for the month.
If you can go to your tax pro with a series of well-organized spreadsheets and receipts, their life will be much easier.
Pro tip: Not sure if something can be used for a deduction at the end of the year? Liberty Tax Service Director of Tax Compliance Brian Ashcraft says: “If you’re unsure, keep it and put it in a file folder. At the end of the year, let someone who understands the tax system discern the value of it. When in doubt, file it.”
Freelancer Tax Tip #7: Make Your Tax Sessions Interactive
There’s a reason why your CPA has the IRS.gov website bookmarked as a favorite, but you probably avoid the site like it was an exotic death-virus. You’ll find that most people who go into taxes actually enjoy tax preparation.
So, don’t be afraid to ask them questions when you sit down with them either to go through your deductions or do a simple consultation. They like talking tax.
“When you’re sitting with us as we go through your tax return, be engaged with us,” Kristina Grasso said. “We don’t want to be just a person typing in information.”
The more chatter you have with your tax person, the more likely you are to learn about deductions and business-related topics, and the more likely your tax professional will get all the information he or she needs to ensure your return is accurate.
Freelancer Tax Tip #8: Digital Nomads Are Still on the Hook for Taxes
Living abroad is a great way to maximize the freelancer lifestyle, but just because you like to globetrot doesn’t mean that you’re off the hook for your tax payments.
Blogs and colleagues might tell you that the Foreign Earned Income Exclusion (FEIF) is your way to duck taxes while you’re on the road, but the FEIE is actually not as easy as people make it seem. There are a lot of issues that you have to work through in order to qualify.
If you think you’re eligible for the exclusion, it’s best to talk with a tax pro, because they’ll be able to walk you through the nuances of overseas life and, in some cases, deduct any taxes you paid while working overseas.
“Remember, the U.S. taxes you on your worldwide income,” Kristina Grasso said. “It doesn’t matter if you were sitting in Singapore or Secaucus, you have to do a return.”
Pro tip: Read up on tax laws before you dive into a full-fledged nomad life. The best way to do that is to read through the IRS Foreign Earned Income Exclusion information page.
Freelancer Tax Tip #9: Prepare for Self-Employment Tax
When you were a W-2 employee at someone else’s company, your employer was paying half of your FICA contributions to the social security and Medicare systems. Now, you’re paying the entire amount because, technically, you are the employer and employee of your company.
This comes as a shock to some freelancers because they don’t expect to see the added tax burden. A great way to get an idea of how much you might pay in the upcoming year is to use Bankrate’s self-employment tax calculator.
“The biggest thing freelancers don’t realize, especially the ones who leave an employer and go out to be self-employed or do side work, is self-employment tax,” said Eric Green, tax attorney and partner at Green & Sklarz LLC. “Most people don’t realize that, and they see the tax and … it catches them by surprise.”
But what happens if you realize too late that you’re not paying enough quarterly taxes to cover income and self-employment tax? You owe the IRS.
Pro tip: Read through the IRS self-employment page to get a good sense of your tax obligations.
Freelancer Tax Tip #10: Installment Plans Help You Pay Off What You Owe
Let’s say this is the first year you’ve filed taxes as a freelancer and you get the awful news that you owe a couple of thousand dollars. First, don’t panic. Second, take action.
The IRS has set up what’s known as an installment plan to help you pay off your taxes in a consistent, easy way.
“If you owe less than $50,000 to the IRS and you can pay it in less than 84 months,” Eric Green said, “then just pick up the phone, call the IRS and set up a payment plan. The bleeding has to stop.”
The worst possible thing you can do, Eric said, is to not file your taxes because you’re too afraid of the consequences.
The IRS will be your friend if you take responsibility and try to pay what you owe, but it’s an entirely different narrative if you intentionally avoid your duty as a taxpayer.
“The IRS will be more than happy with you if you call and set up a payment plan,” Eric said. “The ones who get hammered are the ones who hide, and there’s no better way for the IRS to get your attention than to get into your bank account and seize everything you have.”
Pro tip: Installment plans can be paid on the IRS website either by bank transfer (free) or by credit/debit card through a third-party website (fee of at least $2.50). Head to the IRS website to learn more about setting up an installment agreement.
Freelance Tax Tip #11: You Can Deduct Business-Related Insurance
Freelancers aren’t limited to writers, photographers, developers and graphic designers. There are thousands of consultants, tax professionals and home renovators who are out on their own.
Depending on what profession you’re in, you might be paying for insurance policies that protect you from property damage, physical injury or lawsuits that come about as the result of your work.
“If you’re a freelance accountant and you help other businesses and individuals or are providing advisory services, then you’re probably in a situation where you want professional liability insurance,” says Maxime Rieman, director of product marketing at small-business insurance firm CoverWallet. “This would be a normal business expense, which would apply to a majority of cases.”
Pro tip: As with nearly every deduction on your 1040, you’ll need to read up on the specifics of business deductions to see if your workplace insurance qualifies for a deduction.
Freelancer Tax Tip #12: File Your Taxes
This might seem like a given, but freelancers can get caught up in a dangerous mix of intimidation and fear.
They’re intimidated by the stories they hear about filing taxes when you’re a 1099 worker, and they’re afraid of making mistakes on their returns or owing the IRS money.
Freelancers and W-2 workers struggle with this, and it leads some of them to skip the whole filing part and live under the assumption that the IRS doesn’t care.
They do care – you’re hit with a 5% penalty of the original amount owed for every month you don’t file (penalty is capped at 25%).
Related: Top Tax Season & IRS Scams to Avoid
When we asked Scott Cody, a financial planner with Latitude Financial Group, which taxpayer mentalities scare him the most, here’s what he said.
“Freelancers who don’t pay taxes, and the stories I hear of people not filing returns for a year or two; that’s what I cringe at,” Scott told us. “Those are the scary ones.”
The “scary” part of it is that you don’t have anywhere to hide. The IRS knows that you’re not paying your taxes, they know about your income and they know how much you have in the bank. At some point, they’re going to let you know that it’s time to pay up.
Pro tip: The IRS has a set of rules about what happens when you file late or don’t file at all.
Being a freelancer has a lot of advantages.
You set your own schedule, you can assume a nomad lifestyle and move to another country and you can choose to work from the comfort of your own home.
But with this freedom comes a responsibility to be proficient not only in your craft but in your tax returns, too. If you’re going to run a successful business, you have to have a tax-season game plan.
There freelancer tax tips we’ve listed in this article are as solid as they came, offered up by tax professionals and financial planners who known taxes and planning as well as anybody.
If we could condense their expert freelancer tax advice, we’d reduce it to four main points.
1. Stay organized throughout the year.
Keep meticulous records of what you buy for your business, what you earn and what you’ve set aside for taxes.
2. Know your deductions.
Home offices, business supplies, business-related insurance policies and other things like self-employment healthcare can reduce your post-deduction income down and result in less taxes.
3. Hire a professional if your tax situation is more than you can handle.
The worst thing you can do is avoid tax season by not filing or filing before all your forms come in. If you’re overwhelmed by it all, hire a tax professional, whether it’s a CPA, tax attorney, tax advisor or enrolled agent.
4. Don’t be afraid of the IRS.
You’re not going to end up in jail unless you commit some serious tax fraud. So, if you find out you owe a few thousand dollars, don’t freak out. The IRS is pretty friendly if you show you’re willing to resolve the situation.
If you choose to use tax software for this year’s return, take a look at our article on the four most popular tax filing sites. We’ll help you understand how much each site costs, what their strengths and weaknesses are and if you’re eligible to file for free.