To the outside world, it would appear freelancing offers many advantages. You get to be your own boss, set your schedule, manage responsibilities, and submit work in a timely manner. But the reality is there’s a ton of discipline that goes along with this lifestyle, and at no other time is this more apparent than tax season.
We spoke with some professionals about what freelancers must remember to avoid costly mistakes come April 15.
The first thing freelancers need to keep in mind is estimated tax payments, says Paul Jacobs, certified financial planner and chief investment officer with Palisades Hudson Financial Group.
“While employees have income tax withheld from their paychecks, independent contractors need to pay in their income on their own during the year,” Jacobs says. “It’s important to make sure you’re paying your share of income tax.”
This happens quarterly and must be made for both federal and state income tax, if that’s an issue, depending on where the person works.
The dates to do this are April 15, June 15, Sept. 15, and Jan. 15, says Ryan Saltz, licensed tax professional with Tax Defense Network, LLC.
Beware the Self-Employment Tax
Freelancers can get into trouble and end up with back taxes or tax debt if they don’t stay on top of expenses, keep good records, and prepare well.
An example: The self-employment tax can be a bitter pill for those new to working alone and who aren’t familiar with how expensive this tax can be, Jacobs says. The tax is 15.3 percent on the first $118,500 of a person’s income.
“Don’t get caught off guard by the self-employment tax,” he says. “[The tax is] something employees are seeing as well, but they don’t see it as much because it’s being deducted from their paychecks.”
The next thing to keep in mind: 1099 filing requirements. Contractors usually receive 1099 MISC forms, but if they subcontract any work out, they need to file their own 1099s.
“In the course of business, you may be responsible for filing a 1099 MISC with the federal government and the state and also the person you paid,” Jacobs says. “It can be overwhelming for freelancers but once you get the hang of it, it gets easier.”
After your first 1099 MISC filing, you’ll know what to look for in future years.
Continue reading this article on Beyond Bylines: Personal Finance: Tax Tips for Freelancers.