There are a lot of things to love about freelancing. You set your own rates, make your own schedule, and run your business the way you want. Then tax time rolls around and you start questioning all this freelancing business and if it’s really worth it.
Hyperbole aside, filing taxes as a freelancer is never fun. It doesn’t matter how many years you’ve done it. It’s just one of those occupational hazards you have to accept.
What you don’t have to accept, though, is the stress and risk that comes with tax prep. In this post, we’ll look at 9 things you can do throughout the year to make tax time go more smoothly from here on out.
A Guide to Filing Taxes as a Freelancer
The key to reducing stress and eliminating errors when it comes to taxes is to be proactive. So while there are some tips here to help you with filing taxes as a freelancer, there are many more tips that will help you to prepare throughout the year.
Jump to tips in this article:
1. Know Which Taxes You Owe
Before you can prepare and file your taxes, you have to know what you owe and who you owe it to. This depends on a couple factors.
I’ll give you an example from here in the United States. All U.S. freelancers that make more than $400 in a year owe the following taxes to the federal government:
- Social security
Depending on which part of the U.S. a freelancer lives in, they might also owe taxes to the state as well as to the city they reside in.
If you’re unsure of which taxes you owe, do a Google search for “paying tax as a freelancer in…” and then add your specific location. This will let you know which government taxes you have to pay, in addition to things like VAT taxes.
2. Automate What You Can with Software
If you don’t already use software to manage this aspect of your business, then now is the time to sign up! It doesn’t matter if you plan to pay a tax professional to handle this for you. Software makes it much easier to track income, categorize expenses, and prep your tax forms.
Although tax prep software sounds like it’s all you’ll need, accounting software is a necessity as well.
You can only use tax prep software when it’s time to file. Accounting software allows you to keep tabs on your money and deductions all throughout the year. Some accounting apps even tell you how much you owe and when to pay your quarterly taxes.
If you can, try to find accounting and tax software that directly sync with one another.
For instance, TurboTax and QuickBooks are both made by Intuit. So you can do all of your freelance accounting in QuickBooks during the year. Then, when you’re ready to file, you click a couple of buttons and your data seamlessly imports into TurboTax.
3. Track Your Earnings
Keeping track of your income can get messy when you freelance. If you were employed, all of it would be documented by your employer. As a freelancer, income may come in for different amounts and at irregular intervals. And you’re the only one who can keep tabs on it.
You could wait until it’s time to file your freelance taxes to calculate how much you’ve earned. However, there are a number of issues that can lead to.
First is that you won’t know how much to pay for your estimated taxes. So you could end up overpaying, underpaying, or missing these critical tax payment milestones altogether.
Second is that you might overlook an invoice or payment and forget to log it when filing your taxes. This doesn’t necessarily mean you’ll get audited. However, if your client files paperwork that doesn’t line up with what you claimed on your own, it could cause problems for you.
There are a couple of ways to track your earnings throughout the year. I’d suggest using both methods.
The first is to create a spreadsheet where you manually log all paid invoices. By setting up this spreadsheet, it will get you in the habit of paying close attention to your earnings. It’s also useful for things like creating a budget and calculating your profit and loss.
Include the following labels at the top of your spreadsheet:
- Payment date
- Client name
- Gross income
- Net income
The net income doesn’t refer to what you make after taxes though. This is your income after processing fees have been taken out by your bank or a payment processor like PayPal. It’s just a more accurate portrait of how much money has come in from the work you’ve done.
The second thing to do is to connect your business’s banking accounts to your accounting software. This way, you’ll have an automated income tracker working for you. If it connects to your tax software, it’ll also make light work of importing that data when tax time rolls around.
4. Keep Receipts for Professional Expenses
Your accounting software is a useful tool when it comes to money management in general. In addition to tracking your income, it will also track your expenses.
What’s more, you have the ability to categorize those expenses. For example, here are some of the expense categories offered in QuickBooks:
- Apps and software
- Health insurance
- Federal taxes
- Work spaces
When you get around to calculating your deductions, this is going to be a super helpful resource. Also, the better you are at logging deductions in your accounting software, the more accurate an estimate you’ll get for your monthly or quarterly tax payments.
It’s also helpful to track your professional expenses in a separate spreadsheet. Here’s what mine looks like. It has the following labels at the top:
- Monthly Cost
- Is It Tax Deductible?
I use this spreadsheet so I can note down expenses the second I’ve paid for them. I can also make notes about whether they’re tax deductible, if I want to spread the payments out over a few years, and so on. I can also add links to my physical and digital receipts here.
While your bank or credit card will have a record of everything you’ve spent money on, the way those charges are labeled isn’t always clear. So it’s important to save all your receipts and to document your expenses as soon as you can.
5. Deduct Money from Each Paycheck
It’s too risky to take all your earnings, dump them into a dedicated account, and then expect that you’ll have enough money there to pay your estimated taxes throughout the year. It’s also too risky to wait and see what the tax bill is just before it’s due.
Instead, you should set aside a certain percentage of your earnings every time you get paid. How much that is depends on which taxes you owe (from Tip #1) as well as your tax bracket (if applicable).
If you’re a U.S.-based freelancer, the SmartAsset tax calculator will tell you what percentage of your earnings to deduct and set aside based on your tax bracket. All you have to do is enter your estimated annual earnings, your location, as well as your filing status.
The calculator then breaks down your tax responsibility at the bottom. For instance, a single freelancer in Wichita, KS making $60,000 a year would owe:
- 22.00% in federal taxes
- 7.65% to FICA (social security and Medicare)
- 5.70% to the state
- 0.00% to the city
This doesn’t account for business deductions. When filing taxes as a freelancer, you can significantly lower your tax burden by taking advantage of deductions.
Although this calculator can’t help you with that, your accounting software can. It’s not a perfect solution, but it’ll help you get closer to what your actual estimated taxes need to be.
So start with this calculator (or a comparable solution for your locale). Make note of the tax rates in a spreadsheet. Then use them as a benchmark so that you know what the maximum amount of taxes is that you’ll have to pay in a given year.
You’ll now know the right percentage of your earnings to put aside.
6. Set Reminders to Pay Estimated Taxes
Because you don’t have an employer deducting taxes from your paycheck, your local government may require you to make estimated tax payments at different times of the year. In the U.S., for instance, we make four quarterly payments.
If you don’t know what the schedule is or when the due dates are, look up “estimated tax payment schedule for freelancers in…” and add your location. Then add them to your calendar and task management software.
This is how I have it set up in my Google Calendar. This is the next payment I owe on January 15:
In addition to noting the due date, I have an additional reminder set for a week before so that I know the deadline is coming up.
In addition to setting reminders, make sure you’re all set up to make your estimated payments.
Not all tax payments go to the same place. So if you owe Federal, State, and Local taxes, bookmark the links to the payment portals for each so you’re not scrambling to find them on the payment due dates.
7. Collect All Necessary Forms on Time
When you’re employed, you typically receive a tax form from your employer that breaks down how much you earned and how much they deducted in terms of your taxes. When you freelance, clients don’t always owe you forms, especially if you work for clients in other countries.
So the first thing to determine is what kinds of tax forms your local government requires from you as a freelancer. For instance, U.S. clients must provide freelancers with 1099-NEC forms if their earnings exceeded $600.
If you need to collect forms from clients, send them a notice at least a month before tax filing opens up. Remind them of which type of form they owe you, the deadline, as well as what your current address is.
The next thing to determine is if there are other forms you need in order to file your taxes. For example, you might need forms pertaining to:
- Health insurance payments
- Student loan payments
- PayPal or other payment processors
- Bank fees
- 401K contributions
Keep a list of all the forms you need. Then check them off as they arrive. Once you have them all, you can get started with filing your freelance taxes.
8. Write Off Your Freelance Deductions
When you file taxes, you’re not just telling the government how much you earned and how much you paid in estimated taxes up until this point. You also need to report your deductions.
You can deduct common and necessary business expenses from your total profits. These are some of the standard deductions that freelancers claim:
- Home office
- Office supplies
- Web hosting and domain
- Marketing and advertising
- Professional licenses
- Business-related fees
- Health insurance
- Liability insurance
- Education and certification
- Conference-related fees and travel
By deducting these expenses, you’ll lower the amount of taxable income you have. So if you paid too much in estimated taxes throughout the year, this is one way to get a tax refund when you file.
Here’s how it works:
Let’s say your gross income (pre-tax) is $60,000. You owe 29.65% in federal taxes and social security. That means you owe $17,790.
Now let’s say your gross income is $60,000 but you had $5,000 in tax deductions. That brings your taxable rate down to $55,000. So now you only owe $16,307.50.
The more deductions you claim, the less you’ll owe in taxes. Whether you use tax prep software or hire a tax accountant, both will help you maximize your reduction and help you take home more of your earnings.
9. File Your Taxes Ahead of Time
Just as you marked down the deadlines for your estimated tax payments, do the same for the tax filing date.
That doesn’t mean you should wait until the deadline to file though. You know how it goes with freelancing. Sometimes it feels like you have a good handle on your workload. Then a client suddenly drops something in your lap and you have to scramble to get it all done.
It’s better to file your taxes early so that you’re not left trying to file at the last possible second.
To ensure that happens, pick a day to work on your taxes and nothing else. And make it the same day every year. Gather up all your documents, open up your accounting software and spreadsheets, and then spend the rest of the day working on them.
This will also be beneficial in terms of your taxes. If you end up owing more money, you’ll have a bit more time to make the payment before the deadline. On the other hand, if you’re getting a refund, you’ll receive that money sooner rather than later.
Whether you’re filing your own taxes as a freelancer or hiring a tax accountant, now is the time to ensure that you’re prepared to do your tax return right.
Using the tips above, you’ll be able to take a proactive approach to managing your business’s earnings and tracking deductions, which will make filing go smoothly. Also, by submitting estimated tax payments on time and in full, you’ll avoid penalties associated with late payments.
Even if you do outsource this work to an accountant, these tips still apply. While they’ll file the return on your behalf, you still need to keep track of income and receipts and have enough money saved to pay taxes. So keep this list handy so you know how to do that.