These days, a lot of people are turning to the freelance arena as a way to make ends meet. With an ongoing recession firmly entrenched and layoffs and extended unemployment continuing to permeate society, people with skills to offer are selling them to the highest bidder and finding ways to stay contracted throughout the year. Although this is great for any individual or family just trying to stay afloat during these troubled times, it can cause real problems concerning taxes. If you’ve never filed as an independent contractor before, you might find a nasty surprise waiting for you come tax time. You may not have realized that your previous employers paid a portion of your taxes (federal, state, and even social security) in addition to automatically withdrawing your portion from your paycheck. All of these expenses will now be due all at once, and the number can be astonishingly high. But there are ways to hang on to the lion’s share of your earnings by cutting back on what you pay.
The first thing you need to know is that there will be no W2 coming your way. Regardless of how many clients or jobs you take on during the year, you need to keep METICULOUS records of all transactions, including both invoices and actual payments. You also need to save all receipts related to business expenses. In fact, it wouldn’t be a bad idea to have a business checking account and/or credit card to keep everything separate from your personal expenses (it will make your taxes a lot easier to calculate). Now you just have to go through the process to sort everything out.
Some of your clients may send you a 1099 detailing your payments. Some won’t. You can’t rely on this. But you also can’t report less earnings than those appearing on your 1099s as it will result in an audit (which nobody wants). You therefor need to report as accurately as possible. You will be doing this with a 1040 Schedule C form, which is fairly similar to the forms you’re already familiar with. It’s not brain surgery, after all. You may have wondered how you could earn twice as much as a freelancer, despite the fact that you were doing the same job. You’re about to find out.
Most of us make payments to the IRS with every paycheck (the portion that is withdrawn before we ever see our earnings). You now have to pay that amount in one lump sum, plus whatever portion your employer was paying. So while you might have paid less than 20% throughout the year and gotten a return before, you will now be paying out closer to 30% (or more) of your total earnings for the year, which could be a hefty chunk of change. Luckily, you do have a couple of options to whittle down this number.
One way to avoid this bloodletting every April is to file quarterly estimated taxes (which means filing and paying four times a year, although it will often result in paying less and certainly save you from that monster payment at year’s end). But the major saving grace of freelance work is that you can claim an incredible amount of write-offs. Work from home? Claim a home office. Travel frequently? Expense your car and airline tickets. You can also claim a work phone, internet, equipment purchases (computer, fax machine, etc.), office supplies, and any other work related expenses (meals, gifts, and even entertainment, in some cases). You’ll need to keep receipts for everything, in case of an audit, but you’ll be surprised by how much you can lower your payment with these many deductions.
And just a word of advice; consider going to a tax professional. These people know all the tricks to help you get the best return while simultaneously avoiding an audit. You may pay a few hundred dollars for their services, but if it saves you thousands it’s well worth the expense (plus, you can write it off!).
Shirley Simpson writes for Totally Money where you can find information on financial products and browse through loans for poor credit to find the card that meets your needs.
