4 Tax Tips for Freelancers and Independent Contractors

Working as a freelancer or independent contractor is appealing to many workers, due to the flexibility of scheduling, workload, and work style. Some freelancers even earn a higher hourly rate than they did when performing the same work as full-time employees. But tax time can complicate this rosy picture. Freelancers have to file different tax forms and follow different tax practices than workers in permanent positions. Here are four tips for handling your taxes as a freelancer or independent contractor.

1. Make Sure You Fit the Classification of Freelancer

Sometimes, companies will pay employees as freelancers because they can bypass having to pay payroll taxes and send in payroll reports. You should be classified as an employee if the company dictates how, when, and where you complete your work, covers expenses like supplies, and otherwise treats you as a permanent staff member. The IRS website can give you a fuller description. If you’re actually an employee, you should get benefits that other employees get and taxes should be deducted from your paycheck as they would be for any permanent worker.

If you believe a company has incorrectly identified you as a freelancer, file a Social Security tax form. Form 8919 will allow you to determine how much Social Security and Medicare taxes should have been paid by the company on your behalf so you can report this amount.

2. Work with a Tax Professional

DIY taxes may be appropriate for the typical American with a full-time permanent job, but freelancers and independent contractors have different concerns when it comes to tax time. You’ll want to make sure you have the correct forms for reporting self-employment income, and you’ll also want to know that you’re taking every deduction you’re entitled to. Getting expert assistance with complicated business matters is important. In a recent survey, about 30% of participants said that they would be more inclined to invest in real estate if they could use the services of a real estate investment professional. When tax time hits, it may be wise for freelancers to hire a professional tax preparer instead of trying to handle their own filings.

Many people assume that DIY tax software is foolproof, but this is only true if you fully comprehend your tax documents and status — and you enter all info correctly. Tax software and the IRS itself may provide confusing instructions, leaving you unsure as to whether you’re entering your information the right way. Your desire to end up with a sizable refund while paying as little as possible is understandable, but errors will end up costing you in the end.

If you use a tax professional, you’ll enjoy peace of mind, knowing that the correct forms and deductions are being filed on your behalf. You may also want to consider hiring a certified public accountant (CPA) who can assist you not only with your current tax filing but with planning for future taxes. A CPA is available to you every month of the year — not just during tax season.

3. Take the Deductions You’re Entitled To

Educate yourself about which deductions you can take as a freelancer or independent contractor, including the ones that are specific to the kind of work you do. Then discuss those deductions with your tax preparer. Despite the fact that freelancers probably won’t spend the U.S. average of 87 minutes per day in their vehicles, due to fewer commutes to the office, they are entitled to deduct some expenses that workers in permanent positions can’t.

Those who are self-employed are allowed to take the standard deduction in addition to business expense deductions. You can simply take the standard deduction instead of listing all of your business expenses. But if you have numerous business expenses, it may be wise to itemize them. To be eligible for deductions, these deductions must total more than 2% of your adjusted gross income. It’s best to research these issues and then consult your tax preparer.

4. Keep Up-to-Datte with Estimated Taxes

If you earn money as a freelancer or independent contractor and think you’ll owe the IRS over $1,000 for the year, you are required to pay quarterly estimated taxes. That’s in addition to the self-employed and regular income taxes due in April! Consult your tax preparer regarding the amount you can expect to own next year and divide that amount by four. If you pay one-fourth of your expected tax bill every three months before each quarterly deadline, you can avoid being hit with a large tax bill next April (unless your tax situation changes). Estimated taxes can be paid through the mail or online.

It’s important for freelancers and independent contractors to keep current with estimated taxes. Just as regular workers have taxes taken out of their paychecks throughout the year, freelancers must pay taxes over the course of a year. The deadlines are April 15, June 15, September 15, and January 15. If you can save more toward estimated taxes than you think you’ll owe, that’s the best course of action, in case your income ends up being higher than you anticipated. If you pay more than you own, you’ll get a tax refund. According to a 2017 survey, 40% of Internet users in the United States reported buying products online several times per month. If you can discipline yourself to refrain from online purchases and saving the money for estimated taxes instead, you’ll be in good shape when next April rolls around.

Tax time is stressful for most people, but it can be especially worrisome for freelancers and independent contractors. The tax forms and rules for self-employed people are different from those for permanent workers. If you make sure of your freelancer classification, get professional assistance, learn about the deductions you’re entitled to, and pay a little more in estimated taxes than you may need to, you’ll be ahead of the game. Then you can enjoy all the benefits of freelancing.

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