While freelancing can be freeing, taxes can be confusing and overwhelming. But fear not, my fellow freelancer, because with the following tips, resources, and tools, you will be ready to tackle your taxes with confidence.
Where do I start?
Skillcrush just released a fantastic guide covering the ins and outs of self-employment tax. This should be your first stop during your tax journey as they cover:
write-offs and deductions
paying a subcontractor
How much should I set aside for taxes?
As a member of the self-employed club, you’ll want to put 30% of your income aside for taxes to cover federal, state and self-employment taxes.
Keep this in mind as you set your rates. You may charge $30/hour for your services, but you’re really keeping $21/hour after taxes. We’ll talk more about setting rates on the next blog, so don’t forget to subscribe at efbooth.com.
What’s the deal with estimated taxes?
Being self-employed, you are responsible for sending Uncle Sam estimated quarterly taxes. That means paying taxes four times a year, not just once, so set your calendar reminders ASAP.
(Speaking of calendars, check out my Top 10 Calendar Tools).
This article provides a fantastic step-by-step explanation of how to estimate your quarterly taxes, when they are due and how to pay them.
Keep in mind that if you don’t arrange to make these payments throughout the year, you could end up with a hefty fine at the end of the year because there will be late payment penalties on top of the taxes that you already owe.
How can I track my expenses?
As a freelancer, you’ll want to keep a close eye on your income and expenses. After all, underreporting income can lead to penalties from the IRS. Fortunately, there are a plethora of great resources for tracking your finances.
Wave Accounting: I’ve been a Wave user for years. It’s a completely free, cloud-based program. You can send invoices, track payments and expenses, run reports, and view your monthly and yearly profits and losses. You can also accept payments from clients, but you will pay a small transaction fee. One of my favorite perks is their responsive customer support team.
Freshbooks: Many of my freelancing friends are Freshbook users. The benefit of this cloud based software is that in additional to tracking expenses and income, you can also track your time, send invoices, accept payments, have customers leave reviews and have any subcontractors track their time. After a 30-day free trial, you’ll pay $9.99/month to manage your first 5 clients.
Zoho Books: This cloud based software is a simple online accounting tool that covers all the basics: create and send invoices, track expenses, sync bank accounts, create reports and do accounting on the go using a mobile device. Though it’s priced at $24.00/month, there are no limits to the number of users, transactions or capabilities.
How can I improve my financial habits?
If you hail from the land of W9 employment and are used to taxes being automatically withdrawn from your paychecks, putting aside 30% of your income for self-employment taxes may be a hard habit to create. Worry not because there are a handful of apps on the market to help you do just that.
Levee: Levee is a mobile app that helps the self-employed optimize tax savings. It looks for ways to reduce your taxes by identifying your tax deductions and tax bracket. It also lets you know when you’re entering the next bracket. Although it comes with a monthly fee of $8-$19/month, you get a complimentary 30 days to give it a test run.
Hurdlr: This app helps you keep track of all your expenses, income streams, and tax deductions in real time. Because Hurdlr was originally built for Uber and Lyft drivers to easily track their mileage for tax write offs, it’s a great app for other freelancers with multiple income streams. Plus, it’s completely free.
What about tax deductions?
Being self-employed does have its benefits, like taking deductions, as long as the expenses are related to your business. Last year, the New York Times released some great tips about what types of expenses self-employed people typically deduct. For example,
“By working out of your home, you can take a home office deduction, as long as the space is used ‘regularly and exclusively’ for business purposes. If that’s the case, you can deduct $5 a square foot of dedicated office space, up to a maximum of $1,500.” – NYT
Other items you may be able to deduct against your income are things like your laptop, phone, advertising costs, travel, etc. I recommend working with an accountant who can help you navigate things you can deduct as an independent contractor.
Even if your goal is to be able to file your taxes on your own, investing in an accountant in the beginning can help you learn how they file your expenses and what deductions you can claim. This can help you save more money in the long-run.
What’s the best software to use for taxes?
One of my favorite financial sites, The Simple Dollar, recently highlighted their favorite online tools to help you submit your federal and state taxes online.
In this article, they breakdown features and pricing for TurboTax, H&R Block and TaxACT. They even help you decipher which software may be the best fit for you.
Can I do my taxes directly through the IRS?
If you want to forego online software, or you want to be better informed about taxes, the IRS has free resources available on their website. Start here for a complete overview of where to start, what forms to file, and how to submit them.
How do I work with an accountant if I’m a digital nomad?
Talk to potential accountants and make sure they are able to work with you and meet your needs if you have special circumstances.
Because my wife and I are usually traveling, one of our main requirements was finding an accountant that was willing to work with us virtually. Communicating via email and signing documents digitally has allowed us to always file on time regardless of where we may be.
Are there any videos?
Here are a few of my favorite step-by-step tax tutorials:
Did you know the IRS also offers webinars for small businesses? Be sure to check the schedule often because their content changes as more webinars become available.
Now that you have a few resources in your pocket when it comes to self-employment taxes, you can stop dreading tax season, and start taking care of business.