Many individuals are transitioning into freelance work models, rather than becoming employees of an employer. Although this change offers certain advantages, it also presents substantial tax-related challenges.
Freelancers who receive 1099 forms from clients need to account for all income and deductions in a timely manner, here are some helpful hints for doing that.
Keep Good Records
Freelancers should maintain accurate records throughout the year and especially during 1099 tax season. Utilizing receipt tracking software can assist freelancers in staying organized and avoiding missteps.
Maintaining detailed records of expenses can also help freelancers save money on taxes. Deductions reduce how much of their income is taxable while credits decrease their total debt on federal tax returns dollar for dollar.
Freelancers should make it a habit of deferring part of their earnings to an account set aside specifically for estimated taxes, in order to avoid an unexpectedly large tax bill at year’s end. Invoice reminders for late payments will ensure payments arrive on time while keeping bookkeeping up-to-date – this is particularly helpful if clients pay through third-party processors such as PayPal.
Deposit a Part of Every Payment
No matter if you’re driving for Uber, designing websites as a freelancer, or selling products on Amazon: you need to know how to manage your taxes as an independent contractor. Record keeping, accounting software and professional advice can all help maximize tax savings and reduce liability.
As a freelancer, when setting aside payments to cover estimated taxes it will make filing accurate taxes easier and avoid fines should underpayment become evident at year’s end.
As a freelancer, your tax refund may differ from that of an employee’s. Instead, refunds may only occur if you overpaid your quarterly estimated payments or made so little that an earned income credit applies; both situations are relatively uncommon though and other tax deductions such as professional development classes and health insurance premiums could help lower your liability.
Deduct Business Expenses
One of the key mistakes freelancers make is failing to track expenses properly. You may be eligible to claim deductions for things such as internet and phone bills, supplies and travel costs – however, to do so successfully you will need proof that these are essential costs in your line of work – keeping receipts or using accounting software that tracks such costs is beneficial in this respect.
Depositing a portion of each client payment directly into your business bank account will help ensure you have enough funds available when filing taxes is due.
freelancers should pay estimated taxes quarterly in order to avoid an unexpectedly large tax bill come April 15th. The IRS provides forms and worksheets to assist freelancers in estimating quarterly payments, while it would be prudent for newcomers to seek advice from an accountant on which type of entity should be formed, along with what potential tax advantages may apply to them.
Hire a Tax Professional
Tax professionals offer invaluable help, whether filing taxes independently as an individual or running a small business with plenty of paperwork. Hiring one ensures compliance with all legal standards while taking advantage of every deduction available to them.
Filing taxes and understanding tax laws requires time-consuming effort that could otherwise be spent more productively on other aspects of business or life.
Employing an honest and dependable tax professional is essential. Look for one who uses fixed fees or value billing instead of hourly billing rates, to reduce any chances of any unsavory dealings. In addition, make sure they have been certified by an established organization. Interview candidates before selecting one to prepare your taxes – this will ensure you find someone suitable and comfortable working on them; additionally inquire as to their experience representing clients during IRS audits.