Have you recently become a freelancer? Are you worried about getting on the wrong side of Uncle Sam? It’s easy to see why. Tax laws are complicated, and the IRS doesn’t mess around if they think you may have messed up. If you’re new to freelancing, here are some tax tips to keep your money safe:
Choose your business entity
Many freelancers choose to operate as a sole proprietor, which you can do with just your social security number. However, you may want to change your business to an LLC, corporation, or partnership down the line. While we won’t go into the difference between these in this post, you should know that these require a federal tax ID number. You also need a tax ID for trust (if you decide to set up a trust in the future), and a number of other things. Be sure to check if you change your business entity.
Understand how you’re taxed
When you’re an independent contractor, you’re taxed based on your net income- that means your income minus any business expenses. This amount is taxed twice, so you’re paying both self-employment tax and regular federal income tax. Self-employment tax is your share of your social security and Medicare taxes. When you’re an employee, you pay half of this and your employer pays the other half. As a freelancer, you’re responsible for paying both halves.
Pay estimated tax
Most people only have to worry about tax once a year. When you’re self-employed however, you must pay the IRS much more often. This means paying estimated taxes which are due in April, June, September, and January. It’s a good idea to simply remove a third of your income whenever it comes in and put it in a savings account that you don’t touch, so you’re not out of pocket when it’s time to pay your taxes.
As a freelancer, you have to pay a number of expenses to run your business. And many of these are deductible. In order to deduct these at tax time, you need to be able to show records of what you spent, when it was spent, and how it’s related to your business. Luckily, there are plenty of excellent apps that can help you keep all of this straight. Take photos of all of your receipts so you don’t lose them, and keep updating this information regularly so you’re not in trouble at tax time.