That is my ninth yr of full-time freelance writing, which I’d wish to say makes me an knowledgeable at freelance taxes.
Nonetheless, the reality is that I be taught one thing new yearly — whether or not it’s how a lot to put aside for estimated taxes, what accounting software program I must be utilizing or what proportion of my web invoice counts as a enterprise expense.
I gives you this tip, as somebody who’s been within the freelance tax-paying recreation for some time: the very best factor you are able to do as a freelancer is get a CPA, and the second-best factor you are able to do is ask your CPA questions. Belief me on this one.
Asking the appropriate questions can prevent quite a lot of time and stop you from getting caught with an sudden tax invoice in April.
So let’s dive in. First, we’ll have a look at what inquiries to ask your accountant earlier than tax time, then we’ll have a look at what estimated taxes are and easy methods to pay estimated taxes, then we’ll have a look at different often requested questions, aka FAQs for freelancer taxes.
Ask these inquiries to your accountant earlier than tax time
Listed here are a few of the questions I want I’d requested my CPA once I first began doing freelance taxes, in addition to a couple of objects I wouldn’t have identified about except my CPA had instructed me.
Do not forget that I’m not an accountant, so if you would like actual tax recommendation, you’ll want to ask your personal CPA these identical questions:
1. Is there a most popular accounting software program you’d like me to make use of?
After I began freelancing, I did all of my accounting on a handmade spreadsheet, assisted by a couple of Gmail folders labeled “tax deductions,” a field of paper receipts and my financial institution statements. Final yr, I received a brand new CPA who urged I swap to an ordinary accounting software program. This could make her life simpler, as she wouldn’t should decipher my spreadsheets — which make good sense to me — and he or she thought it’d make my life simpler as effectively.
Seems she was proper.
In the event you aren’t already utilizing a contract accounting software program, it’s price it to strive one. The Write Life recommends FreshBooks and Harvest, however you also needs to ask your CPA if they’ve a most popular accounting software program.
2. What can — and might’t — I do in my residence workplace?
I used to freelance in a studio condominium, and my CPA instructed me that, since I used the identical small desk for writing, consuming, and watching TV reveals on my laptop computer, it didn’t depend as a house workplace.
To say the house workplace deduction, he defined, I needed to have an area reserved just for work.
After I moved into a bigger condominium, I had sufficient house to order a nook for a house workplace.
If you wish to declare the house workplace deduction, discuss to your CPA about what you may and might’t do in that house to verify it qualifies.
3. Is my laptop computer or cellphone a depreciating asset?
Your CPA could ask you about depreciating property, that are bodily objects that lose worth over time.
You’re allowed to deduct a portion of this asset’s value over the lifetime of the asset, which is the sort of assertion that’s sophisticated sufficient that you need to actually go away it to your CPA.
However you also needs to ask your CPA in case your laptop computer is a depreciating asset. In the event you use your smartphone for enterprise, or when you’ve got cameras or microphones for vlogging or podcasting, ask about these too.
Any expertise that you just use for work and often substitute would possibly depend as a depreciating asset, and get you yet one more tax deduction.
4. What proportion of my cellphone and web payments can I deduct?
In the event you use your house web for enterprise — and what freelancer doesn’t? — you might be entitled to deduct a proportion of your web invoice in your taxes. Similar goes in your smartphone invoice.
Relying on what your CPA thinks of your house workplace, you may additionally be capable of deduct a few of your utilities. Ask. Don’t assume your CPA will deliver it up.
5. Do I want a enterprise license?
Typically paying federal and state taxes aren’t sufficient. Relying on your enterprise, chances are you’ll want a enterprise license, which comes with enterprise taxes. You might also must pay metropolis taxes as effectively.
So ask your CPA whether or not you want a enterprise license. Don’t simply go to your state’s licensing web page, search the licenses, and assume that you just’re okay since you don’t see a license possibility for “freelance author.”
I pay enterprise taxes to the State of Washington below the class “Service and Different Actions; Playing Contests of Likelihood (lower than $50,000 a yr).” That’s why you’ll want to ask an expert about these sorts of issues.
6. What deductions ought to I observe?
Freelancers are sometimes entitled to extra deductions than we notice, and we deserve to assert all of them. In the event you go to a writers’ convention, for instance, you’ll in all probability be capable of deduct the price of the convention, the price of the journey, and a proportion of your meals.
However you gained’t know what you may deduct till you ask. Analysis supplies? Postage? That point you requested one other freelancer for an informational interview and paid for the espresso? What in regards to the Lyft you took to interview a supply? Or the mileage, should you drove your personal automotive?
There are many potential freelance deductions on the market, so it’s essential to observe your bills, even the small ones, and ask your CPA which of those bills you need to deduct.
Don’t neglect to ask which deductions you would possibly overlook, or which deductions you need to observe for subsequent yr’s taxes, like the price of that accounting software program you simply purchased!
Estimated Quarterly Taxes – The What, Why, and How
Everyone knows to file a person tax return by April yearly.
However do you know that as a enterprise proprietor, you’re anticipated to file estimated funds each quarter, as effectively?
It’s true. When you anticipate to owe the federal authorities at the very least $1,000 in taxes every year, you might be anticipated to file quarterly taxes all year long.
Why? As a result of the federal government doesn’t need to wait till April to get a minimize of what you earn. It desires you to pay as you go, similar to should you had been an worker at an organization that withheld taxes out of your paycheck and paid them constantly in your behalf.
Paying quarterly estimated taxes isn’t non-compulsory; should you fail to pay up all year long, the federal government might penalize you with curiosity whenever you file your tax return for not paying sufficient tax.
Submitting quarterly is outdated hat for me now, however I keep in mind how I felt about this once I first launched my very own enterprise. I puzzled how on earth new enterprise homeowners had been alleged to learn about this! No fairy Godmother reveals up at your door and says, I see you’re self-employed! Let me stroll you thru your tax necessities.
I used to be lucky to have my accountant dad, who co-authored The Cash Information for Freelance Writers, to teach me. Right here’s what he taught me.
Why you must pay estimated quarterly taxes
Understanding you’re alleged to do one thing usually isn’t sufficient for sensible enterprise homeowners. We need to know why we’re alleged to do it. Plus, understanding the logic behind this will make it simpler to comply with by way of.
So right here’s why quarterly tax funds exist. One of many perks of working for another person’s firm is that they pay taxes on behalf of the worker all year long. Every time that worker will get a paycheck, the corporate withholds Social Safety, Medicare and earnings taxes, which implies that cash’s gone earlier than the worker even opens the paycheck.
In consequence, workers generally neglect they’re paying taxes all year long. Even when you understand these taxes come out of your paycheck, it’s not one thing you suppose a lot about till you file your annual tax return and work out whether or not you must pay extra or obtain a welcome refund.
Right here’s the distinction whenever you’re self-employed: no firm pays these taxes in your behalf. It’s as much as you to make the funds. And whenever you achieve this each few months, it’d really feel like a kick within the intestine.
The explanation it hurts a lot is as a result of taxes eat up a good portion of your earnings. Most freelancers who encounter this for the primary time suppose they earned first rate take-home pay throughout the quarter, solely to understand they should pay a giant chunk of these earnings to their federal and state governments.
As an alternative of getting pissed off with taxes, let’s deal with serving to you perceive when and easy methods to pay them, so you may get again to the enjoyable components of operating a enterprise.
When are estimated taxes due?
This tends to be one of many greatest questions round quarterly taxes: when are estimated taxes due?
You’re required to file them on the identical schedule every year. (Except, after all, the federal government delays these deadlines due to a pandemic or another widespread catastrophe, prefer it did in 2020.)
Right here’s the schedule for submitting estimated funds:
- By April 15: to cowl earnings from Jan. 1 – March 31 (Q1)
- By June 15: to cowl earnings from April 1 – Might 31 (Q2)
- By Sep. 15: to cowl earnings from June 1 – Aug. 31 (Q3)
- By Jan. 15: to cowl earnings from Sep. 1 – Dec. 31 (This fall)
The schedule may be complicated as a result of funds aren’t due precisely three months aside. They’re known as “quarterly funds,” however, as you may see, they don’t all cowl a three-month interval.
Nonetheless, due to how these “quarters” are unfold out, it’s OK to consider every cost as protecting three months’ price of tax, if that’s simpler to wrap your head round.
In the midst of this schedule, you’ll even have one other large deadline: tax day on April 15.
In the event you’ve filed a tax return beforehand that features self-employed earnings and used a tax software program like TurboTax, that software program will seemingly offer you estimated tax cost kinds. It’d even let you know how a lot to pay quarterly, basing these estimates on what you earned the earlier yr.
What ought to I do about estimated taxes if my earnings will increase?
That is the one query I want I had requested sooner.
The primary CPA I labored with checked out my yearly earnings and gave me a set of estimated tax vouchers to make use of on the next yr’s quarterly estimated taxes. I received 4 accomplished estimated tax kinds, every with an sum of money that I used to be alleged to pay. All I needed to do was write the checks and drop the estimated tax vouchers within the mail on their respective due dates (or pay on-line).
Nonetheless, I elevated my freelance earnings considerably from the earlier yr to the subsequent. I didn’t notice that meant I used to be paying considerably much less in estimated taxes than I ought to have been paying.
My CPA and I found that, because of my elevated earnings, I owed the IRS an extra $5,443.
In case your CPA offers you estimated tax vouchers, ask what you need to do in case your earnings will increase.
In my case, I began placing apart a proportion of my earnings to go in the direction of estimated taxes, as a substitute of paying a hard and fast quantity on a voucher.
The right way to pay estimated taxes
Let’s assume that is your first yr as a freelancer and you’ll want to hunt down quarterly cost kinds for the primary time. You’ll be able to pay on-line; this IRS web site lays out your choices.
You can too pay through verify after downloading this way on-line: Kind 1040-ES.
Whereas I do virtually all my filings on-line nowadays, I nonetheless pay estimated funds through verify, as a result of I’ve a system that works for me. I maintain paper kinds for estimated funds in a folder in my workplace, so as soon as it’s time to pay, I don’t have to go looking on-line to seek out the appropriate kinds and addresses for the place to ship them. All my paperwork is ready proper in that folder, and I can simply write a verify and drop it within the mailbox.
Fear you’ll neglect to pay estimated taxes? I add reminders for all of those dates on my Google Calendar once I file my tax return every year, so I do know I’ll see the reminder all year long.
How a lot estimated tax do you have to pay?
How a lot tax you pay relies on your tax bracket and a number of different components, together with how a lot you may declare in deductions. This may make it troublesome to determine how a lot estimated tax you need to pay.
However right here’s the excellent news: Estimated tax funds are merely estimates. They’re not anticipated to be good. They simply should be shut sufficient.
Your aim — and what the IRS requires — is to pay both 100% of the estimated tax that might be due in accordance with your earlier yr’s tax return, or 90% of what you truly owe this yr.
To make this easy for you, I want I might say, “put apart 30% of your enterprise revenue every quarter to pay estimated taxes.”
However you would possibly pay extra, otherwise you would possibly pay much less. Listed here are 3 ways to determine how large a verify to write down every quarter.
1. Ask your accountant
In the event you work with an accountant, you may ask them that can assist you work out how a lot to pay in estimated tax. They’ll stroll you thru it so the result relies in your particular state of affairs.
For many of us, that is one of the best ways to get an correct determine.
2. Use final yr’s tax return as a information
Take a look at your tax return from final yr. In the event you anticipate your earnings to be comparable this yr, work out your efficient tax charge.
Since your efficient tax charge isn’t listed in your tax return, right here’s a easy solution to calculate it: divide the overall tax you paid final yr by your adjusted gross earnings.
Then use your efficient tax charge to calculate your estimated taxes: multiply your efficient tax charge by this quarter’s revenue.
This isn’t an ideal methodology, nevertheless it ought to get you shut sufficient.
3. Depend on IRS kinds
An alternative choice is to make use of the worksheet on IRS Kind 1040-ES to determine how a lot you owe.
Spoiler alert: this isn’t simple! Even IRS worksheets that are supposed to make our lives simpler are usually extremely sophisticated.
Paying estimated quarterly state and native taxes
Sure, you must pay state earnings tax along with federal earnings tax. Except you reside in a state with no earnings tax.
State earnings tax varies significantly relying on the place you reside, beginning at zero in 9 states. In West Virginia, the place I reside, it’s about 6.5%. In California it’s greater than 13%.
Whether or not your state collects earnings tax and the way aggressively has a giant impact on how a lot you’ll want to put apart for taxes. The identical goes for native taxes. In the event you reside in California, which has excessive state tax, or New York Metropolis, which has excessive native tax, you would possibly end up having to place apart 35% to 40% of your earnings for tax. In the event you reside in Texas, which doesn’t accumulate earnings tax, you would possibly fall on the decrease finish of the spectrum, placing apart 25% or much less of your earnings.
In case your ears perked up once I stated “no earnings tax,” right here’s an inventory of 9 states the place that dream is actuality: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. New Hampshire and Tennessee additionally don’t tax wages, however they do tax funding earnings and dividends.
Some individuals who have flexibility over location transfer to states with no earnings tax to maintain extra money of their pocket. It provides up over time!
To determine easy methods to file estimated state tax the place you reside, merely google “[your state] estimated tax funds.” That ought to return kinds and directions, together with an choice to pay on-line by way of your state’s division of tax or income web site; keep away from third-party websites that cost you for submitting.
Directions range by state, however pay your state estimated taxes on the identical schedule as your federal funds. Native tax deadlines are normally totally different than federal and state deadlines.
Methods for protecting estimated tax
Simply since you solely should pay these taxes 4 occasions every year doesn’t imply you need to wait till then to consider them. In truth, should you make that mistake, you may not come up with the money for within the financial institution to cowl your estimated funds.
That’s why many freelancers squirrel away cash for taxes every month. Some freelancers go away that cash sitting of their checking account till it’s time to pay up, whereas others open a separate checking account to gather cash that can ultimately go towards taxes, to maintain them from spending it.
Freelance author Nicole Dieker, for instance, wrote about how she stashes away 20% of her earnings every month. Why solely 20%? As a result of on the time of writing that put up, she lived in Washington State, which doesn’t have state earnings tax. That is why it’s so essential to know your state’s legal guidelines and work them into your monetary technique.
Monetary author Carrie Smith at one level made a daily switch of 15% to twenty% of her earnings right into a separate financial savings account. She even nicknamed the account “Revenue Taxes.”
“The exhausting half is vowing to not contact it,” Carrie wrote on her weblog. “However should you can keep it up, the subsequent time you must pay your tax invoice, you’ll be glad you place this technique into follow.”
Placing cash apart for estimated taxes, somewhat than hoping you’ll have sufficient when it’s time to pay them, is one sensible solution to lower your stress whereas working for your self.
Getting an excellent CPA is step one in the direction of operating your freelance enterprise successfully.
Asking the appropriate questions — particularly round tax time — is the second.
Do each, and also you’ll in all probability discover that your freelance taxes get simpler yearly.
What questions do you would like you’d requested whenever you began doing freelance taxes?
That is an excerpt from The Cash Information for Freelance Writers: The right way to Handle (And Really feel Good About) Your Funds.
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