Unless you harbor a fascination for numerical tedium or entertain odd hobbies, chances are filing taxes doesn’t top your list of thrilling things to do. But when you’re a self-employed freelancer, the onus of paying Uncle Sam looms over you year-round.
Filing your taxes doesn’t have to be headache-inducing. Getting a jump now on filing your tax return for 2018 will make for a smoother process.
Here are some ways freelancers can best prepare to file their tax return this year.
Tax Prep Is a Yearlong Endeavor
When you’re self-employed, taxes aren’t seasonal. Freelancers are in a unique financial position, explains Katherine Pomerantz, founder of The Bookkeeping Artist.
“They’re individual taxpayers, but they’re also small businesses,” says Pomerantz. “Whereas individuals only think about taxes once a year, for businesses, it’s tax time year-round.”
Reality check: Employers handle a lot of tax reporting on behalf of their worker bees, says Pomerantz. “With every paycheck, a business collects, files and pays taxes on your behalf. A company must also file sales tax every month, and sometimes even pay income tax on behalf of the organization several times a year.”
Stay on Top of Your Bookkeeping
So even though, as the owner of a freelancing business, you aren’t required to pay quarterly income tax or monthly sales tax, you should still be in a year-round tax mindset. You should have daily, weekly and monthly bookkeeping checklists to follow so you’re on top of your recordkeeping. As a freelancer, I transfer funds to my business bank account every Friday, work my voodoo magic in my accounting software weekly and send invoices at the end of the month.
Don’t neglect to squirrel away a portion of each paycheck as if you were paying taxes. How much should you tuck away? There’s no universal percentage — the amount you need to save for taxes depends on variables such as how your business is set up, your tax deductions, marital status, income and where you live. Pomerantz recommends socking away 15% to 30% of your income each month for taxes. “It’s money you will owe eventually, and it’s much better to plan ahead and pay on time, rather than accidently spend that money and owe late fees and interest,” says Pomerantz.
Gather Those Documents
When filing taxes, you might be just fine referring to your credit card and bank statements. While the chances of getting audited are slim, you should still gather your receipts and keep them stowed away in a fireproof box. As for your income forms, your clients have until January 31 to send you copies of any 1099 and W-2 forms. However, if a client neglects to send these forms by then, you’re still on the hook for paying taxes.
“Every penny of income is reportable, even if you didn’t receive a 1099-MISC — or other 1099 form, such as INT,” says Eric J. Nisall, founder of AccountLancer. “That rule is meant to reduce paperwork, not to allow you not to report income.”
You can order what’s called a Wage and Income Transcript from the IRS, which has info from your 1099s and W-2 forms that was reported to Uncle Sam. Just be prepared to jump through a few hoops to verify your identity. If you purchased health insurance through the marketplace, you’ll need a copy of your 1095-A. If you earned money on interest or dividends, you’ll need a 1099-INT or a 1099-DIV.
Keep Your Clients Looped In With Changes
If you moved or made changes to your business, such as forming an LLC or doing business under a new name, let your clients know as soon as possible. Otherwise, the income forms you receive from them might not be accurate and could create a snag.
Last year, I did both: moved to another city and formed an LLC. Along with all the challenges I had to deal with in setting up my LLC, I made sure to email the accounting departments of my clients. That way, come tax time, my 1099 forms will be up to date.
Consult With An Accountant
Even if you’re used to doing your taxes yourself, it’s a good idea to meet with an accountant to file your 2018 taxes, Pomerantz says. That’s because the Tax Cuts and Jobs Act 2017 changed what is deductible and how taxable income is calculated. “Most freelancers will not have time to read the entire new tax law, so it’s a good idea to have someone double-check your work this year,” Pomerantz explains.
Because your tax situation isn’t easy, it’s generally a good idea for freelancers to use an accountant every year, says Pomerantz. “With multiple income streams, self-employment taxes and extra reporting requirements for business income, a freelancer’s financial life is anything but simple,” says Pomerantz. “Consulting with an expert will help you plan ahead for the best tax savings and ensure you don’t make mistakes.”
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