7 Things Freelancers Must Do to File Their Taxes CorrectlyBusiness Taxes
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So you picked up some freelance work last year. Great!
You are now officially self-employed in the eyes of the IRS, and this means that you need to figure out the whole tax thing.
When you’re an employee of somebody else, taxes are easy. You get your W-2, plug it into your tax software, and you’re good to go.
But now as a self-employed individual, you have to figure out the numbers to put on your tax return.
Scared? Don’t be. Follow the seven tips below, and you’ll have your taxes figured out in no time.
1. Make sure you actually have to file a tax return.
Not everybody who makes money during the year needs to file a tax return.
Of course, just because you’re not required to file a tax return doesn’t mean it’s not a good a idea to do so.
Someone who had taxes withheld from their paycheck, for example, would still want to file a tax return to get a refund for these withholdings even if they aren’t technically required to file a tax return.
OK, so what are the magic income numbers at which you have to file a tax return?
Well, I’m going to have to answer this question in two parts since the rules for people who don’t have any self-employment income are different from the rules for people who do.
For Non-Self-Employed People
Now, if you’re common folk — that is, not a member of the self-employed class — the income tax filing thresholds are over $10,000 for some and even over $20,000 for others. (And for those who file as married filing separately, it’s $5.)
Check out the chart below. If you don’t have self-employment income, then you would able to go off this chart to see if you are required to file a tax return or not.
|Filing Status and Age||Required to File if Income Is at Least|
|Single, under 65||$12,200|
|Single, 65 or older||$13,850|
|Married Filing Jointly, both spouses under 65||$24,400|
|Married Filing Jointly, one spouse 65 or older||$25,700|
|Married Filing Jointly, both spouses 65 or older||$27,000|
|Married Filing Separately, any age||$5|
|Head of Household, under 65||$18,350|
|Head of Household, 65 or older||$20,000|
|Qualifying Widow(er), under 65||$24,400|
|Qualifying Widow(er), 65 or older||$25,700|
For Self-Employed People
But you, my friend, are self-employed, and you’re subject to a different chart in addition to the one above.
Here’s the chart of when you have to file a tax return based on the amount of self-employment income you have. Hint: it’s a lot simpler than the previous chart.
|Filing Status and Age||Required to File if Net Self-Employment Income Is at Least|
Yes, you read that correctly. The minimum freelancers need to earn to file income taxes is a paltry $400 in net self-employment income.
Note that this is your income after you take deductions against it.
Once you hit that $400 net threshold, and you have to file Schedule C to report your self-employment income and Schedule SE to determine your self-employment tax.
That said, if you received a Form 1099 for $20,000, and you have $19,700 of expenses against it such that your net self-employment income is only $300 — that is, less than the $400 threshold — it still might be a good idea to file a tax return to show the IRS that your net income is in fact only $300.
Otherwise, they may send you a letter asking you why you didn’t file a return to report the $20,000 Form 1099 (remember, they don’t know the amount of your business expenses unless you tell them).
2. Put together your books.
OK, so you made $400 or more of net self-employment income, and you’re going to have to file that Schedule C and pay that self-employment tax.
Just taking a looking at Schedule C, you’ll notice that Line 1, “Gross receipts or sales”, is pretty straightforward. It’s basically asking how much were you paid by your clients during the year.
But then you have Lines 8 – 27 where you input all your expenses, and you can’t just put them on one line.
You have to categorize them, which is actually super easy to do once you get organized. Here’s how.
Gather Receipts and Other Statements
If you haven’t kept track of your expenses during the year, you’ll want to go through all your business receipts, credit card statements, and bank statements.
Once you’ve compiled these records, you can put together your books.
Put Together Your Books
Your “books” is just accounting jargon for your bookkeeping records. For a simple freelance business, all you really need (for tax purpsoes anyway) is a statement of profit and loss i.e. an accounting for how much you made during the year.
If you’re pretty serious about freelancing, I would recommend that you use an online bookkeeping software like Quickbooks that will make maintaining a clean set of brooks a breeze. Quickbooks imports your bank and credit card data into its interface, and all you have to do is categorize the income and expenses items while Quickbooks does the rest.
But if you only have a few expenses to track, or if you’re just strangely obsessed with spreadsheets, compiling all your numbers in an Excel document or Google Sheet is better than nothing.
I’d recommend using the expense categorizations on Schedule C, which are as follows:
- Car and truck expenses (I’ll talk more about these in a bit)
- Commissions and fees
- Contract labor
- Depreciation (you can likely take bonus depreciation on any assets you purchase strictly for your business)
- Legal and professional services
- Office expense
- Taxes and licenses
- Travel and meals
3. Don’t forget about your home office.
Now, there are some expenses that you can deduct on your tax return that won’t necessarily be reflected on the books you put together for your business.
One example is the home office deduction, which is calculated on Form 8829 and reported on Line 30 of Schedule C.
What Qualifies as a Home Office?
If you work from home, and you have a space in your home that you use regularly and exclusively for your freelancing business, then congrats — you have a home office.
However, if the space isn’t used regularly and exclusively for your freelancing business, it doesn’t count as a home office.
For example, let’s say you do a lot of work on your laptop in bed. Does your bedroom count as a home office? Nope, because it’s not used exclusively for your freelancing business; you also sleep there.
Once you’ve established that you actually have a home office by this definition, you need to measure it to come up with its square footage.
After you have this number, you’re ready to move on to actually calculating the deduction.
You have two options for calculating the home office deduction: the simplified method and the actual expenses method. You should go with the one that results in the greater deduction for you.
Using the simplified method of calculating the home office deduction, you simply take the square footage of your home office (up to 300 square feet) and multiply it by $5 per square foot. The result is your home office deduction.
So if your home office is 100 square feet, your home office deduction would be $5 using the simplified method.
Actual Expenses Method
The actual expenses method is a bit more involved.
Using this method, you first determine your home office percentage by dividing the square footage of your home office over the total square footage of your home.
So if your home office is 100 square feet, and your entire home is 1,000 square feet, your home office percentage would be 10%.
Then, you multiply this home office percentage by the actual expenses you incurred to live in and maintain your home such as mortgage interest or rent, insurance, property taxes, utilities, etc.
Let’s say your mortgage interest is $10,000, your property taxes are $3,000, your homeowner’s insurance is $1,000, and your utilities are $1,000. So the total of these household expenses is $15,000
If your home office percentage is 10%, then $1,500 of these expenses would count toward the home office deduction.
Then you add in any costs that are specific to your home office. For example, if it cost you $300 to paint your home office, then you would add this amount to the $1,500 calculated above for a total of $1,800 cash home office expenses.
Finally, if you own your home, you must depreciate your home office by determining your basis in your home (building portion only), multiplying this basis by your home office percentage, and calculating your depreciation expense based on a 27.5-year useful life.
4. Don’t forget about your vehicle deductions, either.
If you’re a work-from-home freelancer who gets all of your work online, then you probably don’t have very many vehicle deductions.
But if you drive to meet clients or for some other work-related purpose — say, to attend a freelancer conference — then you very well may have some vehicle deductions to take.
The mileage method is extremely straightforward: you simply determine the number of miles you drove in your freelancing business and multiply this number by the mileage rate that the IRS determines annually.
For 2019, the mileage rate is $0.58 per mile driven for your business. So if you drove 10,000 miles for your business in 2019, your deduction would be $5,800.
For 2020, the mileage rate is $0.575 per mile driven for your business. So if you drive 10,000 miles for your business in 2020, your deduction would be $5,750.
Actual Expenses Method
The actual expenses method is a bit more involved.
Using this meethod, you have to determine the business use percentage of your vehicle by dividing the number of miles you drove for business use during the year by the total number of miles you drove during the year.
Then you multiply that business use percentage by the total actual expenses you incurred for the vehicle during the year such as insurance, maintenance, and gas.
Finally, you calculate the depreciation on the vehicle based on the business use percentage.
5. Pick your tax software.
While you could download and print tax forms from irs.gov, complete them yourself by hand, and then sign and mail them off, it’s must easier to run your numbers through a tax software that will walk you through your tax returns step-by-step.
TurboTax is generally regarded as the cream-of-the-crop tax software, and having reviewed it several times myself, I can see why.
If you are a full-time freelancer with significant income and expenses, it’s probably the best choice for you.
H&R Block, although most widely known for its walk-in tax offices, also offers a robust tax filing product.
If you have less than $5,000 in expenses for your freelancing business, you qualify for the H&R Block Premier Edition and do not have to pay extra for the Self-Employed Edition.
This is in contrast to TurboTax, which forces you into the Self-Employed Edition to report any freelancing expenses on Schedule C.
6. File an extension if you need more time.
Yes, the original due date of your Form 1040 is April 15, but you can set that deadline back six months until October 15 by filing an extension.
How to File an Extension
The easiest way to file a tax extension is to do it through your tax software or through the IRS Free File program.
Note that while many states don’t require you to file a separate extension for state tax purposes, some do.
You can also download Form 4868, complete it by hand, and mail it to the IRS.
Don’t Forget to Pay Your Taxes
Of course, your tax extension is merely an extension of time to file your tax return, not to pay any tax liability due.
It’s important that you estimate the actual amount of remaining tax you owe for the year and pay this amount to the IRS and your state (if applicable) by April 15.
7. Hire a pro if you’re not confident.
You’re great at what you do, but you may not be great when it comes to taxes and accounting.
And that’s perfectly fine! If all this tax stuff is confusing, or you simply don’t have time to do it, find a local tax professional in your area to do it for you.
What to Look for in a Tax Professional
Look for industry expertise.
Hiring an accounting professional experienced with your type of business makes things go smoothly.
They know what keeps you up at night and are aware of potential risks on the horizon for your business.
It’s easy to find a remote CPA or bookkeeper, and they can be a great option if you’re comfortable.
But if you prefer meeting in-person or need a lot of hand holding, consider choosing a local firm that can be more hands-on.
Where to Find a Tax Professional
The best place to find a tax professional is your circle of friends and acquaintances, especially other freelancers in your field.
So tap your network to find good candidates.
With the recent popularity of Facebook groups, it’s easier than ever to find recommendations.
Remember, when people refer others, they typically take it seriously as their reputation is on the line.
Logan is a practicing CPA and founder of Choice Tax Relief and Money Done Right. After spending nearly a decade in the corporate world helping big businesses save money, he launched his blog with the goal of helping everyday Americans earn, save, and invest more money. Learn more about Logan.