The freelance life-style has quite a few benefits — amongst them, freedom and suppleness. Even so, you possibly can’t escape your tax obligation to Uncle Sam, and being a freelancer poses its personal challenges at tax time. Think about these elements that may impression your earnings taxes: (See additionally: 8 Tax Return Errors Even Sensible Folks Make)
1. Monitor All Types 1099-MISC
Each shopper from whom you earn $600 or extra in funds for companies carried out should file Type 1099-MISC, Miscellaneous Earnings with the IRS. Like employer-issued W-2s, each time {that a} shopper points you a 1099-MISC, the IRS receives a notification. They’re important with the intention to show your earnings, so be certain that to maintain monitor of all of them. Typically, type 1099-MISC must be issued by January thirty first. If you have not acquired your type by February 15, request a reproduction out of your shopper to your personal data.
2. Embrace Earnings From All Sources
Whereas a shopper is not obligated to file a 1099-MISC when their complete funds in the identical yr to you’re underneath $600, you are still accountable to report these funds as taxable earnings in your return. The IRS expenses a 25% inaccuracy penalty on prime of relevant taxes and curiosity for late funds, together with earnings from all sources, even when not reported on a 1099-MISC.
(As a aspect notice, we carry on particularly referring to a 1099-MISC by its full title as a result of there are a number of forms of 1099s, together with 1099-DIV, 1099-G, 1099-H, and 1099-INT.)
3. Separate Particular person and Enterprise Funds
That will help you monitor money flows immediately associated to your enterprise, open a separate enterprise checking account and bank card. (See additionally: The 5 Greatest Credit score Playing cards for Small Companies)
The month-to-month statements of these enterprise financial institution accounts and bank cards will mean you can reconcile your month-to-month earnings assertion and can be very useful in case of an IRS audit. When buying round for a enterprise checking account, contemplate one which retains copies of used checks. The reason being that financial institution statements and canceled checks are acceptable paperwork in case you obtain a Type 4564, Info Doc Request from the IRS.
4. Rent an Accountant if Utilizing Schedule C
Schedule C from Type 1040 is one essentially the most helpful tax types for freelancers and aspect giggers as a result of it permits them to deduct all relevant enterprise bills, starting from price of promotion in native media to make use of of dwelling area for enterprise functions. (See additionally: 101 Tax Deductions for Bloggers and Freelancers)
Nevertheless, people utilizing Schedule C typically make errors on this way. Whether or not these errors are intentional or unintentional, the IRS has seen the upper variety of errors and has set the coverage of auditing people utilizing Schedule C thrice extra typically than it does companies. Rent an accountant to file your taxes and they’ll be certain that to cross your t’s and dot your i’s all through your return, together with the pesky Schedule C. To not point out, their payment is an eligible expense in your Schedule C, too!
5. Calculate Your Withholding
Except you are a full-time freelancer, retaining monitor of your estimated tax legal responsibility might be laborious. If you’re receiving earnings from each an employer and portfolio shoppers, you will have extra sources of earnings. In that case, the IRS Withholding Calculator is a useful gizmo to keep away from having an excessive amount of or too little federal earnings tax withheld all year long.
Analyzing knowledge out of your most up-to-date pay stubs, invoices out of your shoppers, and copies of previous tax returns (they may provide help to estimate relevant deductions), this calculator will present you recommendations on how you can replace your Type W-4 along with your employer. Adjusting your W-4 all year long is a brilliant strategy to improve the take-home portion of paychecks out of your employer if you’re withholding greater than you really want to.
6. Make Estimated Tax Funds
As a result of nature of freelancing, you might obtain some final minute assignments that can make your checking account completely happy within the brief time period. Forestall these fortunate breaks from turning into an sudden giant tax legal responsibility by the point you file your return subsequent yr. Everytime you count on a really giant cost or an end-of-year project, use the IRS Withholding Calculator to estimate your crucial withholding.
An alternative choice to adjusting your W-4 is to make a lump-sum cost utilizing Type 1040-ES, Estimated Tax for People, which lets you pay estimated tax funds on April, June, and September of the present yr and January of the subsequent yr. Type 1040-ES could be a lifesaver to compensate for excessive low withholding all year long. For instance, you possibly can submit a cost for tax yr 2016 on January 17, 2017.
7. Do not Overlook About State Earnings Tax
On prime of federal earnings taxes, you are additionally accountable for relevant state and native earnings taxes. Relying on the authorized construction of your enterprise, you might file enterprise earnings taxes on a separate type. Sole proprietors report their private and enterprise earnings taxes on the identical type.
Spreading out your state tax legal responsibility is a greater thought than attempting to give you a big lump sum in only a few days. When you’ve got an employer, you may as well regulate your withholding of state taxes all year long. Most states enable freelancers and aspect giggers to submit estimated state tax funds on a quarterly foundation. To study extra about your relevant state tax obligations, discover the suitable workplace in your state or territory.
8. Get Well being Protection
Beneath the Inexpensive Care Act (ACA), higher referred to as Obamacare, you are topic to a penalty if you go greater than two months with out well being protection. In 2016 and 2017, the penalty payment is 1/12 per 30 days of two.5% of your family earnings or $695 per grownup, whichever is greater. If you happen to did not meet the minimal important protection throughout 2016, use the IRS instrument to estimate your particular person accountability cost.
If you’re a full-time freelancer, you are answerable for getting qualifying protection by yourself. January 31, 2017 is the final day to enroll or change a 2017 well being plan. After that date, you possibly can enroll or change plans provided that you qualify for a particular enrollment interval. To study extra about out there plans in your ZIP code, go to the medical health insurance market at HealthCare.gov.
9. Save for Retirement
Freelancers and aspect giggers with no staff can open a solo 401K to construct or give their nest eggs a significant increase. With a solo or Roth 401K, an unbiased contractor may save as much as $53,000 ($59,000 if age 50 or over) in 2016 and $54,000 ($69,000 if age 50 or over) in 2017. By the way in which, married {couples} and authorized companions receiving earnings from the identical enterprise apply can double these contribution limits. This implies a pair underneath age 50 may doubtlessly contribute as much as $108,000 to a solo 401K in 2017!
If you happen to’re one of many estimated 54 million of U.S. unbiased staff or freelancers, contemplate a solo 401K to decrease your taxable earnings and get nearer to the goal quantity of your retirement fund.