5 Tax Tips for U.S. Freelancers

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Deciding to become your own boss can be thrilling, but the extra work at tax time can kill that excitement if you don’t have your act together. If you’re new to freelancing or are thinking about starting a side gig, these five tips will help guide you so that thrill survives tax season.

1. Be ready for more forms

Your net profits are taxable, so get familiar with Schedule C—it’s where sole proprietors report business income and expenses. (If your business expenses are $5,000 or less, you might be able to file the shorter Schedule C-EZ instead.) You may also need Schedule SE to calculate your self-employment tax.

You may need to hire a tax pro, but if you’re organized, confident, and operating a pretty straightforward business, that may not be necessary. The major tax software players all offer packages that handle Schedule C and other forms associated with self-employment, so shop around to see which one suits you. NerdWallet has a tool to help you find the best tax software for your needs.

2. Get organized

Being self-employed usually means your income fluctuates, so estimate your tax liability during the year to avoid surprises (NerdWallet offers a tax calculator to help you do that, too). If you’re audited, the burden is on you to prove the income and expenses on your tax return. To be prepared, keep good, consistent records and hold on to your documentation for at least three years.

3. Understand the deal with 1099s

If a client pays you $600 or more during the year, you’ll probably get a Form 1099-MISC in January or February. That form shows how much the client paid you over the course of the tax year, and you need to report it. Don’t be sneaky: Your client sends a copy to the IRS, which means the agency will notice if you don’t report the income.

If the client doesn’t send a 1099—either because they paid you less than $600, paid you through a third-party payment network, or forgot—guess what? You still have to report the income (another reason to keep good records), unless the IRS specifically tells you not to.

4. Don’t forget the car

If you drive to meetings or do other business-related running around, you might be able to deduct some of the wear and tear on your car. Generally, you multiply the number of miles you drove your car for business purposes by the IRS’ preset standard mileage rate—54 cents per mile for 2016 and 53.5 cents per mile for 2017—and deduct the total.

Alternatively, you can deduct your actual car expenses, such as depreciation, licenses, gas, oil, insurance, registration fees, repairs and tires. (You do it this way anyway if you use five or more cars in your business.) The deduction generally is based on the total miles driven for business. If you’re leasing your car, check out IRS Publication 463 for rules about deducting lease payments.

5. Deduct your home-sweet-home-office expenses

If you work from home or use part of it in your business (your home has to be your principal place of business), you may get a tax break on some of your mortgage or rent, as well as insurance, utilities, repairs, and similar expenses.

There are two ways to calculate the deduction.

First, you can calculate what percentage of your home’s square footage you use exclusively and regularly for business activities. That portion of your qualified, home-related expenses becomes deductible. So if your office is 10 percent of your home’s square footage, 10 percent of your rent, utilities and other home expenses for the year may be deductible. Note that expenses related only to the business part of the house—say, fixing a hole in the drywall in your home office—are often fully deductible.

Second, you could go with the simplified option, which lets you deduct $5 per square foot used for business, up to 300 square feet. You may not have to keep as many records, but you might get a smaller deduction, so calculate things both ways before filing. IRS Publication 587 has the details.

To learn more about how you can plan ahead and manage your small business finances, contact NerdWallet—or check out one of the other Upwork Business Resources partners.

This story was submitted by NerdWallet and does not constitute the views or opinions of Upwork. This article cannot and should not be relied upon as legal or tax advice.


by @NerdWallet

NerdWallet offers financial tools and objective advice to help people understand their options and make the best possible decisions.