Freelancing offers a lot of freedom, but also a significant responsibility. That’s especially true when tax time rolls around. Here are 5 tips from AAFA to help prepare for tax season and beyond.
Hire Your Spouse or Child
Hiring your spouse can provide substantial tax benefits. First, you must have a legal contract to prove that your spouse is a full or part-time employee. Then, set up a Medical Expenses Reimbursement Plan (MERP), sign up your spouse for the family plan, and have them pay all out-of-pocket expenses for the family. This allows you to deduct all your family’s medical expenses as legal business deductions (use Schedule C for this).
Keep Track of Your Forms
When you’re a freelancer, you receive a 1099-MISC instead of a W-2. Any client that’s paid you over $600 in the last year should send you a 1099-MISC by January 31 and forward the IRS a copy by February 29.
To keep track of your forms, when you receive a 1099-MISC review it immediately. If you find any mistake, let the client know and have them correct it as soon as possible. Once you have all the correct 1099s, file them in one place.
Take Your Deductions
When it comes time to provide the IRS with the information they need, be sure to save all your receipts. Common deductions include:
- Home office
- Money spent on marketing
- Legal and professional services
- Office expenses
- Repairs and maintenance to business equipment
- Taxes and licenses.
Pay Taxes Quarterly
The IRS requires that freelancers pay their estimated taxes four times a year: April 15, June 15, September 15, and January 15. These quarterly estimates help prevent freelancers from taking a large tax hit at the end of the year. Here’s how you will file and calculate your taxes:
Sole proprietor or self-employed individual: File your estimated taxes with form 1040-ES.
Corporation: File your estimated taxes with form 1120-W.
If you haven’t paid your taxes yet, don’t worry. According to the IRS, you only need to pay taxes quarterly if you are the sole proprietor. To stay ahead of your taxes, put away 25% of each check into a separate bank account right away so that you have the money you need when tax season rolls around.
Save Now, Prep for the Future
There are two common self-employed retirement plans: Simplified Employee Pension plan (SEP) and a Keogh plan. You can only opt for a Keogh plan if your business is unincorporated (a sole proprietorship, partnership, or limited liability company). Why invest in a Keogh plan? Freelancers have a higher tax burden than others, so these plans work to their advantage because tax is deferred until funds are withdrawn.
As a freelancer, you are taking a risk operating your own business, but having a plan for taxes can work in your favor. Take advantage of that fact by claiming every tax deduction for which you qualify.
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