Working as an independent contractor has its benefits: setting your own hours, ticking off your to-do list from the couch and choosing which projects you really want to work on. Complicated self-employment taxes, however, generally don’t make the list. But don’t let freelance taxes scare you away from launching a new side gig. Learning these key basics will put you in good position come tax season.
1. You’ll Need to Factor in Self-Employment Tax
Exactly how much is self-employment tax? Independent contractors pay a 15.3 percent self-employment tax, which covers Social Security and Medicare — taxes an employer would ordinarily pay for a full- or part-time employee. You’re required to pay this if you made more than $400 in net self-employment earnings. This tax is levied in addition to income tax.
2. Making Quarterly Freelance Tax Payments Can Ease the Burden When You Owe
The IRS recommends that people who expect to owe more than $1,000 pay “estimated tax.” You can estimate how much you’ll owe annually using 1040-ES, then make quarterly payments (due April 15, June 17, Sept. 16 and Jan. 15, 2020 form) to avoid having to fork over a big sum come Tax Day.
3. You Can Take Advantage of Various Deductions — Just Be Sure to Keep Good Records
Now for the fun stuff! Independent contractors can deduct ordinary and necessary business expenses. What does that mean? According to the IRS, you can deduct business expenses that are both “common and accepted” and “helpful and appropriate” — like a dedicated home office, business insurance and more. It’s crucial to keep accurate, up-to-date records to ensure you and your tax professional can file your taxes correctly.
The home office deduction will likely be your biggest tax break. In order to claim it, your home office must be your “principal place of business” and be used regularly and exclusively. Self-employed taxpayers may choose between two methods (simplified and regular) for the home office deduction. The simplified option is a $5-per-square-foot deduction for a home office, not to exceed 300 square feet. If you don’t have a home office, your co-working space is also deductible.
Trips made exclusively for business, like visiting clients or attending a trade show, may be deducted when you’re filing freelance taxes. That includes airfare, hotels and 50 percent of business meals.
As a freelancer, you’re allowed to write off the cost of certifications, registrations, licensing and other education relevant to your career.
Save receipts for all of your office supplies — everything from pens and paper to laptops and printers. If it’s used exclusively for your business, you’re good to go.
When driving to work-related client meetings and events, freelancers can rack up serious mileage on their vehicles. The IRS has two deduction types: a standard mileage option or actual vehicle expenses, like gas, registration fees and parking.