Whether you call yourself a mercenary, a solopreneur, independent contractor, part of the gig economy, or simply freelance — it ’ s likely you have to file tax returns and are required to pay different types of taxes including calculate payments .
It ’ randomness easy to overlook this boring job, specially when the cash starts flowing in.
But careless of your tax bracket, you could wind up on the ill-timed side of the Internal Revenue Service ( IRS ), Social Security Administration and possibly your state tax authorities. That ’ south nowhere to be when you establish your business .
hera ’ s what you should know to stay on top of your freelance tax responsibilities .
File Tax Returns and Pay Taxes
Whether you work for an employer or for yourself, the IRS requires you to pay taxes as you earn your income throughout the year .
When you work for a traditional employer, you fill out IRS Form W-4 to instruct their payroll department how much to withhold for federal ( and state, if applicable ) taxes. Your employer besides calculates the sum of payroll taxes including compulsory Social Security and Medicare taxes you ’ re creditworthy for and ensures that sum is withheld from your paycheck and paid to the tax authorities .
It ’ s your province when you ’ re freelance .
That ’ second because no employer withholds or pays any taxes on your behalf .
Pay Quarterly Estimated Taxes
As a exclusive owner, it ’ randomness great when you get paid in wide by your clients .
however, Uncle Sam doesn ’ t want you to hold onto that money all year. You have an obligation to pay taxes on earnings from self-employment as you collect tax income from your clients .
once per quarter, you ’ re required to make estimate tax payments on your tax liability .
“ Estimated ” means you have to determine how a lot tax you might ultimately owe. It can be a bite slippery if your taxable income fluctuates during the year .
Simply do the best you can to calculate accurate amounts of your income and expenses. You can adjust the come for the come quarter if you under- or over-estimated your tax liability .
Always pay your quarterly estimated taxes tied if you expect a tax refund when you file your annual reelect. otherwise, the IRS might charge you an underpayment or former requital penalty.
Understand the IRS Forms for the Self-Employed
You ’ ll need versatile forms to calculate and file your taxes. If you still prepare your taxes manually, you have to attach extra forms to Form 1040, Individual Income Tax Return, when filing your annual country and federal tax restitution .
however, do-it-yourself ( DIY ) software such as TaxAct simplifies this tax for you and maximize your tax savings. You fill out a straightforward on-line questionnaire, and the information automatically populates the IRS forms .
As a business owner, you should receive Form 1099-MISC from each node you provided a service for at the end of the class. The kind should list the entire gross dollar amount the customer paid you. That means taxes have not been deducted .
To calculate your quarterly payments, you might look at last year ’ south Forms 1099-MISC to estimate your income for this tax class. Of course, you ’ ll need to adjust those estimates if you ’ ve had a big swing in clientele from last year ’ sulfur amounts .
Schedule C, Profit or Loss From Business
You ’ ve besides have to file Schedule C, Profit or Loss From Business. On this form list your income and your detailed expenses including inauguration costs. If you use DIY tax software such as TaxAct, merely enter your information when prompted. The program will automatically populate your answers in Form 1040. That saves you clock from having to complete both forms !
tip : Pay attention to the section in Schedule C that asks for information about your vehicle. If your car was used for business purposes, you can deduct related expenses. Be sure to keep written records or use an app to track the miles. subsequently, you might have to demonstrate to the IRS which miles were for commercial enterprise versus personal manipulation .
tip : Under certain conditions, you can deduct the manipulation of your home as a business expense. however, the IRS has strict rules about the home agency deduction. You must calculate and deduct only the square footage of the area you use entirely and regularly to run your clientele .
Schedule SE, Self-Employment Tax
not alone do you have to pay income taxes, but you might besides have to pay self-employment tax if your net income income is $ 400 or more ( $ 108.28 for church employees ) .
This requital covers your compulsory contributions to Social Security and Medicare .
To calculate how much you owe, use Schedule SE, Self-Employment Tax. You can pay self-employment taxes with your quarterly estimated tax payments .
As an employer, you can deduct the employer part of your self-employment tax when you calculate your adjusted gross income on your annual return. however, it does not reduce your self-employment tax or affect your net self-employment earnings.
Keep Good Records
It ’ randomness imperative that you keep detail records of all your business transactions .
Make sure to keep your commercial enterprise bank accounts break from your personal control or savings accounts. Commingling funds make it much harder to showcase your business expenses to the IRS if they ever ask .
Track your income and expenses systematically so you can estimate your quarterly taxes and file your year-end return a well as maximize your deductions and tax savings. In addition, keep track of your cash stream so you can plan to pay your taxes on time .