How to do your taxes if you're self-employed, a freelancer, or entrepreneur
Okay, you guys. Full disclosure: I HATE this stuff. But that's EXACTLY why I wrote this post: bc I have a sneaky feeling doing your taxes makes you feel intimidated/ anxious, too.
Calculating and filing your taxes is the ultimate worst "adulting" task out there, IMO. It's hard enough being an entrepreneur without the added stress of taking a big hit in taxes, or even knowing if you're doing everything right!
Please keep in mind that if you are at allworried, it's best to hire a professional. But if you want some guidance about where to start, what questions you should be asking, and practical tips to make tax season easier on yourself and your business, keep reading.
Since starting my coaching & copywriting business, I've learned a TON about things like 1099 forms, how to track your income and deductible expenses, the "Self-Employment Tax" (surprise!), how the 2018 Tax Reform bill impacts us, etc. I'm sharing everything I found simply because I want to save you as much grief as possible this tax season.
PS- You can download this post (for FREE) in printable, PDF form HERE to save it for later:
How To Do Your Taxes as a Freelance Entrepreneur
The Legal Stuff: Freelance Taxes 101
As a freelancer, the IRS considers you both the employee and the employer. Because of this, freelancers are responsible for paying a Self-Employment Tax of 15.3% in addition to their income tax. This self-employment tax is to cover your Medicare and Social Security taxes. People who are NOT self-employed have those taxes taken out of their paychecks automatically. That's why freelancers get hit with it while those employed by a company don't.
So, how do you figure out what you owe and how to pay that extra self-employment tax?
You calculate and report your total earned income as a freelancer using the Schedule SE form, the Schedule C form, and Form 1040.
The "Schedule SE" form calculates your self-employment tax by adding your income up. The "Schedule C" form takes you profits and your deductions and gives you a tidy single number to report that income to the IRS using Form 1040.
**You might be able to deduct the employer portion (50%) from your self-employment tax total on your 1040 form.**
More on Schedule C / form 1040 HERE
More info on Schedule SE / form 1040 HERE
Income Taxes: Keeping track of your freelance income
This sounds like it should be a really simple task, but for many freelancers keeping track of your income from a bunch of different clients can be really challenging. You may get paid not only from many different clients, but using many different methods such as PayPal, Venmo, direct deposit from a freelancing site like UpWork, square, personal check, or credit card service.
Magic Lesson: Tax software like Quickbooks doesn't always have a place for all the information I like to keep track of when it comes to my business/income. Because of that, I like to keep track of every payment I get on a Google spreadsheet (excel works too!). I label the columns with any info I might need to know such as:
Date I booked the job/client
Type of work/project I'm doing for them (copywriting, consulting, marketing)
Platform they hired me on (My Website, UpWork, Social Media/word of mouth...)
Amount of $ I quoted them
Deadlines for delivery
Date work was delivered
Date I was paid
Commissions or service fees, if any (this is for sites like UpWork and PayPal who take a small percentage from your total paycheck)
How I was paid (Venmo, Paypal, check, etc)
Total Net $
Any additional notes I have about the job/client
If you didn't keep track last year, don't worry you're not completely up Schitt's Creek. It's time consuming, but you can go back through your bank statements and create a spreadsheet like I did so you can easily see everything you need to know before filing your taxes.
Track your deductible expenses
Not only do you need to keep track of your income, but also your deductible expenses. It's always better to be safe than sorry when it comes to knowing what things you can deduct, but usually you can legally deduct anything that is a direct expense of your business. According to the IRS, you can claim any expense that is "ordinary and necessary" to operate your business.
When it's time to file, you use the "Schedule C" form to calculate/report how your deductions affected your total income for the year. The IRS says: "Use Schedule C to report income or loss from a business you operated or a profession you practiced as a sole proprietor. An activity qualifies as a business if:
your primary purpose for engaging in the activity is for income or profit, and
you are involved in the activity with continuity and regularity. "
More about Schedule C: HERE.
From my personal research/experience, here are a few things for freelancers and entrepreneurs to check and see if they qualify for deductions:
In-home internet service you use if you work from home
Car mileage driving to/from client meetings (I keep track of this with the helpful app mileIQ)
Meals bought during business or client meetings
Apps or software you use for your business
Memberships to professional organizations
Education/Classes you took for your business
Physical supplies you purchased (this is especially important if you sell physical goods)
Magic Lesson: If you're making (or spending) more than a few hundred bucks each year with your freelance hustle, it might be a good idea to get a separate (business) credit or debit card for your business expenses. It keeps everything organized automatically and makes it way easier to immediately deduce what was a business versus personal expense over the course of the year.
1099 Forms; what are they and do you need one?
If a client pays you more that $600 over the course of the year for freelance services, they are supposed to provide you with a 1099 form for your taxes. BUT WAIT, POLT TWIST! Did you know there are TWO types of 1099 forms?? (I didn't until this year). There are 2 types of 1099's: 1099-K and 1099-MISC.
Both 1099-K's and 1099-MISC's report the total income you earned during the year from an employer. The difference lies in HOW you got paid.
1099-MISC is for miscellaneous income. Meaning, if your client paid you more than $600 over the course of the year for services , they can send you a 1099-MISC. A 1099-MISC is typically for money paid to you in cash, check, or direct deposit.
A 1099-K is for payment card and third party network transactions such as Paypal, credit cards, or third party sites like UpWork.
Because these forms BOTH report income, it can be easier than you'd think for income to get accidentally reported twice. For example, say you write marketing emails for a company and charged them $1000 last year. That income can get reported on a 1099-MISC. But say they paid your $1000 invoice with a credit card. That can get reported on an additional 1099-K. (You're only responsible for paying taxes on ONE 1099 form). This is why it's good to keep records as you go so you can compare totals and make sure you don't get hit twice for the same income.
I found this article really helpful in understanding this concept!
How to report your income/deductions safely
Now that you have all your ducks in a row, gather everything and get ready to file:
Any W-2's from other outside income sources/companies (For example, as an actor, my TV residuals come with a W-2 and not a 1099)
A Schedule C form to calculate how your business-related expenses/deductions impacted your total yearly income
A Schedule SE form to calculate you self-employment tax
Form 1040 to report your total self-employment income
There are a couple options at this point:
File yourself by downloading the forms off the internet and mailing them in
Use a secure service like TurboTax or H&R Block
Take your stuff to a pro
Again, if you have any doubts I highly recommend going to a pro. It costs $ to use their services, but they can actually end up saving you a lot of money (and a lot of grief if you get audited for any reason later).
If you're feeling confident that all your info is accurate, it's great to use a filing service like TurboTax or H&R block. (Then you don't have to worry about things like Schedule SE, Schedule C or Form 1040- they calculate it for you.) They have modules/programs that can guide you through declaring your income, figuring out deductions, and filing your taxes in a thorough, safe, seamless way. This is what I normally do now that I've filed a few times and have it (mostly) figured out.
If you're feeling SUPER DUPER confident, you can download the forms you need directly from the IRS's website and mail them in yourself. This is the most cost-effective solution, but again, keep in mind that you are entirely responsible for making sure everything is Kosher and on the up-and-up.
You can download this post (for FREE) in printable, PDF form HERE to save it for later:
How To Do Your Taxes as a Freelance Entrepreneur
P.S. for 2018 Taxes: The Tax Reform Bill and how/if it affects you
The government passed a bill last year called the "Tax Reform Bill" that may affect how much you have to pay in yearly taxes. Read more here: https://www.daveramsey.com/blog/tax-reform-bill
P.P.S: Should you consider 'incorporating' yourself/ your business?
Full disclosure, I was going to include this info on this blog post but it got super overwhelming. I will be writing a longer post about this at a later date (mostly because I feel like I need to do some more research before I feel entirely comfortable giving any advice on the subject), but as it relates to taxes specifically, I found this article really helpful: