follow these quick tax tips and you’ll find yourself on the right path with your business obligations on the federal and state levels:
- As a freelancer, you are classified as an independent contractor by the IRS, which means that you are taxed on your net self-employment income (gross receipts minus any business expenses you can deduct). Your customers or clients will pay you a gross sum and never take any taxes out like would happen if you were an employee.
- If you make more than $600 per client, then they need to issue you a 1099. It’s good practice to make sure that every client has a W-9 filled out from you on file. You never know when the client relationship may grow into a longer and higher paying gig. Likewise, if you happen to get busy enough to hire additional help, you will not only need to get W-9s for those professionals, but you will also have to issue a 1099 and submit a 1096 to IRS, which shows the total of all the 1099s you issued for the year.
- The net amount is taxed for regular federal income tax, which now ranges between 10% and 39.6%, and then again at a 15.3% self-employment tax rate. Once earnings reach $118,500, this self-employment tax caps out.
- With this type of tax burden hitting your income after expenses, you can see the reason why you will want to stay on top of all the possible expenses you can deduct. This is where you need to familiarize yourself with the types of things you can write off. For example, if you establish a room in your home solely dedicated to your business, you can qualify for a home office deduction that includes a portion of your mortgage interest or rent, utilities, and insurance as measured against the square footage of your office as part of the total square footage of your home. Other deductions include supplies, any education you collect, marketing, client gifts, travel and meals related to your freelance business and some auto expenses also related to getting to job-related meetings or events. You can even write off dry cleaning as long as it all relates to your company. Just be prudent and honest with your expenses. It helps to keep copious records, including an app that can help you scan and catalogue receipts related to your business.
Read the full story at Taxes 101 for Freelancers