As freelancers, we enjoy a lot of perks—the freedom of working in pajamas, setting our own hours, and being our own bosses—but we also have to contend with headache-inducing complexities during tax time. Unlike a traditional W-2 employee with one employer, we have multiple 1099 clients, business expenses, estimated taxes, and the stress to go along with it. Procrastination is, well, understandable.
If you left your returns for the last minute, don’t panic. We’ve rounded up some helpful tips to get you through April.
Count your electronic payments
Many freelancers collect funds from third-party payment platforms like PayPal and Venmo, but not everyone knows how taxes apply to these transactions. Unless you complete 200 transactions and make more than $20,000 through those vendors, you won’t receive any documentation indicating what you made. (If you do hit both those numbers, you should receive a 1099-K). Clients who pay by check or ACH transfer should’ve sent a 1099 in January, provided they paid you more than $600. A 1099 will show the total amount paid, even if the payment was sent via an electronic payment system. A copy of the form is also filed with the IRS, so it’s essential that your tax return matches the 1099s.
Check for penalty waivers
Estimated taxes are the bane of the freelancer’s existence. And while overpaying during the year is a pain, it’s better than underpaying. If you failed to pay enough tax throughout the year, you may incur a penalty. Luckily, you may be able to avoid the penalty if either of two scenarios apply:
- You owe less than $1,000 in tax after subtracting tax withholdings and credits.
- You paid at least 90 percent of the tax for the current year or 100 percent of the tax shown on the return for the prior year–whichever amount is smaller.
Use Form 2210, “Underpayment of Estimated Tax by Individuals, Estates, and Trusts,” to determine if you owe a penalty.
Calculate business expenses
Business expenses are a great way to reduce your tax rate and reap the value of deductions. If you haven’t kept good records throughout the year, it might be tempting to forgo expenses. Don’t. Spending a few hours to pull together financial documents and receipts related to your business can make a big difference in what you owe. IRS publication 535 lists acceptable business expenses, but it’s pretty broad. As a freelancer, your inventory should include:
- Advertising or marketing for your business
- Business insurance
- Business tax preparation
- Continuing education classes
- Depreciation of equipment
- Health insurance
- In-home office expenses
- Technology
- Mileage
- Transportation
- Payment to subcontractors
- Professional fees
- Retirement plan contributions
- Health insurance
- Office rentals
File an extension, but pay now
If you’re unable to file your federal return by this year’s deadline and just send it in when you’re ready, you’ll get hit with a .5 percent failure-to-pay penalty every month plus five percent of the unpaid tax.However, you can request an extension using Form 4868 on or before April 17. While a tax extension gives you another six months to file, you should still estimate how much you’ll owe by the extended deadline and pay at least 90 percent of that to avoid any future penalties. For state tax extensions, check your particular state’s rules since some require a separate form.
Revisit your business structure
The structure of your business ultimately determines which income tax return forms you need to file. If you didn’t incorporate this year, all income flows to your personal tax return. If you defaulted to this method, consider the benefits of setting up a business structure in the future. For example, an S-Corporation can help shield you from additional unemployment taxes of 15.3 percent.Freelancers commonly use the following business structures:
As you think about tax planning for next year, reevaluate your current structure to make sure it’s right for your business.
Plan for taxes throughout the year
Tax planning doesn’t end on Tax Day. Savvy freelancers stay up to date on changes all year long. For example, do you know how the Tax Cuts & Jobs Act will affect your business? If you’re worried about staying on top of relevant updates, consider consulting a tax expert during the off-season to see how changes to the code will impact you. In the meantime, keep calm and track those expenses.