5 steps to help you prepare your freelance taxes for the first time

March 13, 2019
5 minutes read

As of 2018, an estimated one in five Americans worked as a freelancer in some capacity, according to NPR. Moreover, if this trend continues, as much as half of the entire U.S. workforce could be independent contractors within a decade.

Given this upsurge in the freelance economy, an increased number of people have traded in their 9-to-5 office roles for the less corporate, more flexible, position of a contractor.

This career path offers seemingly unlimited benefits and perks, but dealing with freelance taxes can be a headache—especially for those who are new to the process. In fact, taxes are among the most common sources of anxiety in freelancers.

With some guidance and preparation, this annual requirement doesn’t need to be complicated or stressful. If you’re a first-timer who isn’t quite sure how to prepare for tax season, these tips will help you streamline the process, maximize your deductions, and ensure you leave the appointment feeling good.

Save a percentage of each paycheck

Because the government doesn’t take out a portion of your income in taxes each month, as is the standard for regular, full-time employees, you’re responsible for deducting a certain amount from all your paychecks from the last year. All income is taxable, so if you don’t allocate money for that purpose on a consistent basis, then your savings could take an unexpected hit when it is time to file your return.

Since freelancers owe both income taxes and self-employment taxes, a baseline percentage to deduct each month is around 25-30%, according to some experts. In addition, U.S. freelancers will have to get into the routine of submitting estimated quarterly tax payments to the IRS on April 17, June 15, September 17, and January 15.

Get each of your 1099 forms in order

If you earned at least $600 in the calendar year as a contractor or freelancer, you’ll be issued a 1099-MISC form, which reports the sum total of income from each client, explains Micah Fraim, a Certified Public Accountant (CPA) based in Roanoke, Virginia.

Similarly, Fraim adds, if you paid a freelancer more than $600 to perform a task for you (think: a financial advisor to assist with business planning, a web developer to build your website, or a writer to produce content for your blog or social media), then you need to issue them a 1099 form no later than January 31. You can also obtain a 1099-K for income through PayPal or another online service.

Learn how to stay organized all year long with our Complete Guide to Small Business Tax Season to help you track and store all your important forms and receipts.

Account for state and local taxes

In addition to income and self-employment, you should know which local and state taxes factor in. The 2018 tax reform changed the mandatory cap on itemized deductions for combined local and state taxes to $10,000.

Freelancers in areas with high property or state income taxes—such as California, Minnesota, Illinois, New York, and other parts of the Northeast—are most affected by this legislation. In those states, “it is easy to incur taxes that exceed the cap. This is an increase in your after-tax cost of living” and can “make it harder to itemize individual deductions such as mortgage interest and charitable contributions,” say experts at ClearVoice.

This is why an appointment with your CPA before tax season is helpful. They’ll ensure you know what you need to pay and what you need to put away so there are no surprises.

Need a little extra help this tax season? Get personalized help from in-house bookkeepers and coaches with Wave Plus.

Track all business-related expenses

When filing a tax return, one of your objectives is to minimize the amount of tax you owe (within reason, of course). Fortunately, there are a number of expenses you can deduct on your income taxes to lower your overall tax burden as a freelancer.

Still, you can only deduct expenses that are considered “ordinary and necessary for the operation of your business,” so remember to keep your costs to run your business separate from your personal expenses.

As you categorize and track your spending throughout the year, here are a few of the acceptable deduction categories for items you can typically write off:

  • Office equipment and materials
  • Education and certifications
  • Business-related food or dining
  • Car mileage and gas payments
  • Business-related travel expenses
  • Transportation
  • Lodging
  • Meals
  • Home office expenses
  • Partial writeoff for rent/mortgage and utilities
  • Internet and phone bills
  • Technology
  • Furniture

For more guidance on common tax deductions for freelancers and small business owners, read our article on the top 10 tax deductions and expenses.

Work with a CPA

Even with all this advanced preparation, the first year of filing taxes as an independent contractor is a definite learning curve. For that reason, it’s wise to hire an accountant to review your income, calculate business expenses, determine which are considered write-offs, then generate the return and file it. This eliminates the guesswork for you and lowers the risk of an audit.

Choose a CPA who specializes in working with freelancers or small business owners, suggests Laura Shin, Forbes finance expert. They’ll know the ins and outs of how to best prepare you for tax season.

Start prepping for next year’s taxes now

When you’re new to the freelance world, taxes can feel intimidating, but it doesn’t have to be stressful. Use these tips to get organized and know what you need to pay so you can start putting money away and find a CPA sooner than later. In the end, you’ll be more informed and ready, allowing you to make the most of your tax appointment and position as a freelancer.

Want to get ahead on next year’s filing? Here’s how to get started prepping your taxes now.

By Jessica Thiefels

The information and tips shared on this blog are meant to be used as learning and personal development tools as you launch, run and grow your business. While a good place to start, these articles should not take the place of personalized advice from professionals. As our lawyers would say: “All content on Wave’s blog is intended for informational purposes only. It should not be considered legal or financial advice.” Additionally, Wave is the legal copyright holder of all materials on the blog, and others cannot re-use or publish it without our written consent.

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