Tax Tips for Freelancers and Self-Employed Professionals
As a freelancer, independent contractor, or self-employed business owner, it’s important to plan ahead for your taxes. Federal and state taxes are not automatically deducted from your paycheck when you’re a contractor, and for those who are new to self-employment, it can be a big shock to learn they owe the IRS a lot of money when they file their annual return.
Understanding what you might owe and when, as well as keeping meticulous financial records, is the best way for self-employed professionals to stay on top of their tax obligations. To help keep your finances in check, here are some tax tips for freelancers and self-employed individuals to follow.
1. Understand which taxes you are responsible for paying.
Freelancers and self-employed professionals are responsible for paying self-employment and income taxes. The federal self-employment tax rate is 15.3% for the 2020 tax year. Each state has its own rules about income tax, so be sure to check with your accountant if you’re not sure what you might owe your home state.
2. Make your estimated quarterly payments.
After you’ve made a certain amount of money, you are required to pay estimated quarterly taxes . Estimated taxes can be tricky for people who are new in business and don’t have a history of projections, but if you don’t pay enough throughout the year, you may be subject to a penalty fee.
To help avoid incorrectly estimating your taxes, always let your accountant know when your revenue exceeds your estimates. Providing your accountant with your estimates as each quarter approaches its end can help you adjust your payments to more closely reflect your owed estimated taxes.
3. Keep track of your income and expenses.
Excellent bookkeeping that includes keeping track of your income can be essential during tax season. Your accountant will need to know how much money you made so they can advise you on your future tax payments accordingly.
4. Understand which credits and deductions you’re eligible for.
As a freelancer or self-employed professional, you’ll be able to deduct certain business expenses from your taxable income. Keep track of all your ongoing expenses and as often as possible, including keeping your receipts and credit card statements as forms of proof.
Depending on the type of business you run, the activities you’re involved in, and whether you have employees, you may also be eligible for certain tax credits at the end of the year. This is especially true for the 2020 tax year, as many businesses will be able to take advantage of certain provisions in the CARES Act. A financial professional can help you understand what you’re eligible for and what proof/records you’ll need to provide to take advantage of these credits and deductions.
5. Organize your records, receipts, and business paperwork.
Keep all your business paperwork organized in a safe place, as you’ll likely need it to file your taxes. As noted above, you will want to have copies of receipts and client invoices, as well as any tax forms that you provide to your employees and/or contractors.
6. Consult with a trusted tax professional.
When it comes to your taxes, hiring a qualified CPA firm like Miller and Company LLP can help save you time and money. While it’s helpful to know what taxes you’re responsible for paying among other things concerning your finances, you are busy running your business and staying on top of the latest tax laws can be time consuming.
Contact us today to schedule your consultation with one of our experienced tax professionals.
Read more tax tips for freelancers from Paul Miller, CPA, on Business Insider.