Most people gravitate toward a self-employed life for the freedom, flexibility, and fun of being their own boss. Those perks are just a few aspects of what makes freelancing such a rewarding pursuit, though there is one little detail that tends to cause anxiety for newcomers: Taxes.
As a freelancer, juggling taxes is a bit more complicated than what the average person has to contend with. Surviving the gauntlet of tax season doesn’t have to be a huge ordeal. However, it’s important to make sure you understand the best practices and your tax obligations as an independent professional to avoid any issues.
While you should consult with an expert in your local area before submitting your taxes for 2015, as different locations can have their own requirements, these useful tips from the Hiring Headquarters—Upwork’s resource for entrepreneurs, executives, and freelancers—will help keep you on the right side of the fence when it comes to taming your taxes this year.
Freelance Tax Tips for 2016
Tax law is ever-shifting, and it pays to stay on top of the latest regulations and requirements for freelancers. Changes from year-to-year can have a major impact on what you owe the government or whether there are additional deductions for you to take advantage of.
“2016 Tax and Financial Tips for U.S. 1099 Independent Contractors” covers some of the basics for your freelance tax affairs. It includes three valuable takeaways relating to taxes this year:
Get health insurance ASAP. For the 2015 tax year, the penalty for not having health insurance is $285 per adult or two percent of your income, whichever is greater. While buying into a health care package may not be cheap, it’s rapidly becoming too expensive to not have insurance—both to protect yourself from unexpected medical expenses, and because the penalty next year will be even higher.
Know what the IRS expects of you. As a freelancer operating as a sole proprietor, you’ll have to include a Schedule C, which breaks down your personal business earnings, expenses, and deductions when you file a regular Form 1040 for taxes. Also, if you expect to owe more than $1,000 in taxes for the year, you’ll have to set up estimated quarterly payments to avoid penalties.
Report all of your income. As a self-employed individual, the government expects you to track and report your income. It’s up to you, then, to keep good records and be honest in reporting your earnings when you file taxes.
Getting the Most Out of Deductions
The one upside to managing taxes as a freelancer is the ability to write off expenses that relate to your business. Tracking your ongoing expenses and keeping all of your relevant receipts each year—in either digital or physical form—is something every freelancer should be vigilant about.
Deductions can have a significant impact on reducing the overall amount of taxes you owe in a given year. While you can’t write off just anything as a tax deduction, there is a lot of flexibility for writing off expenses if they directly relate to the work you do.
“The 8 Most Important U.S. Tax Benefits and Deductions for Freelancers” offers a rundown of the most popular expenses freelancers often deduct, including these four key categories you should be sure to deduct if they apply to you.
Home office. If you have a dedicated workspace in your home, whether it’s a spare bedroom or more standard office setup, the home office deduction is a must. Start by calculating your office’s square footage, then figure out what percentage of space it takes up when compared to your entire home. You can deduct that percentage from important bills like your mortgage or rent, Internet, office phone bill, and more. Be sure, however, that the primary use of this space is for work.
Travel expenses. When you travel for business, you can deduct a wide range of expenses, including your flight, hotel, car rental, and even a percentage of your meals. Even if you’re only working for part of the trip, you may still be able to deduct a portion based on the percentage of work to non-work time.
Insurance and retirement savings. Self-employed professionals can deduct a range of insurance premiums—from health insurance to liability coverage. Looking to save more of your income from taxes? Consider contributing to a SEP IRA or other retirement plan.
Advertising expenses. Materials you use to advertise your business—including paid ads, web hosting for your site, and business cards—are worth tracking to add to your expense list.
Important Tax Deadlines to Remember
Once a minimum threshold of income is reached, self-employed individuals must pay taxes on the income they’ve made as it comes in. To avoid any penalties, estimated payments should be made quarterly to both your state’s taxing authority and the IRS. Here are the important dates and deadlines for 2016.
Taxes to be filed by:
April 18, 2016
Quarterly estimated payments due by:
April 18, 2016 (for payment period of Jan. 1 to March 31)
June 15, 2016 (for payment period of April 1 to May 31)
Sept. 15, 2016 (for payment period of June 1 to Aug. 31)
Jan. 17, 2017 (for payment period of Sept. 1 to Dec. 31)
How to Check Your Earnings by Client on Upwork
To help you keep track of your earnings for each of the clients you work with in a given year through Upwork, you can quickly print a report, so it’s easier to track your earnings when tax time rolls in.
Here’s a quick step-by-step walkthrough of how to access this info:
- Login to the Upwork dashboard and select Reports from the top toolbar. This will take you to a screen that shows your current work in progress, pending income, and your timesheet for the week.
- To the far right of this first graph, click on the More Reports button and select Earnings By Client from the dropdown menu.
- The next page will show you a detailed rundown of earnings by client. You can easily break the readouts down by year, quarter, or month. All of this information can also be downloaded in a CSV spreadsheet. That’s it!
This article does not address all tax issues for freelancers, and it cannot and should not be relied upon as legal advice. Readers are strongly encouraged to seek tax advice based on their particular circumstances from an independent tax advisor.
You can find more information about filing and paying taxes from the U.S. Small Business Administration. Looking for more articles with self-employment advice for freelancers? Check out the Hiring Headquarters.