More and more people are turning away from traditional full-time jobs and choosing to start their own freelance business nowadays.
When you consider the benefits of freelancing, these statistics come as no surprise. As a freelancer, you are your own boss. You control your work hours and can choose how much or how little you want to work. You can even choose which clients to work with and how much you want to charge per project or hour.
However, despite all this freedom to choose, there is one area where you have no choice, and that is with regards to paying income taxes.
Yes, that’s right, there’s no escaping tax season just because you’ve chosen the freelancing route. Everybody who earns above a certain limit has to pay tax, and this applies whether you freelance full-time or part-time. As long as you are receiving an income, regardless of how you are earning it, you are subject to federal tax laws.
Here’s where far too many freelancers tend to get careless. Some ignore their tax liability completely, while others calculate their taxes incorrectly. Both of these mistakes can cost you dearly.
So to make sure your freelancing business stays safe financially, this quick guide to paying taxes in 2020 will help you avoid the common pitfalls of freelance taxes.
Understanding Self-Employment Tax & Tax Liability
Taxes on freelance earnings are calculated differently from taxes on income earned from a regular 9-5 job.
For those who work at full-time jobs, Social Security and Medicare taxes are automatically deducted from their paycheck. The employer then covers 50% of those taxes.
Because freelancers do not have an employer or a regular monthly income, they do not get these deductions at the source nor do they get the benefit of their employer’s contribution. To offset this scenario, where the freelancer is both employer and employee, all freelancers pay self-employment taxes in addition to their regular income tax. The self-employment tax rate is 15.5%.
The Schedule SE Form 1040 is a great resource if you need help calculating your self-employment tax. It gives you detailed information about what you should and shouldn’t include in the calculation. If you meet certain requirements, you may also be eligible for deductions such as the employer-equivalent amount of your self-employment tax on your form 1040.
Timeline For Paying Freelance Taxes
If you expect to owe at least $1000 in taxes for the year 2020, you are required to pay estimated taxes every quarter starting from April 15, 2020.
This is the schedule for the quarterly estimated tax payments in 2020.
- First estimated tax payment – April 15, 2020
- Second estimated tax payment – June 17, 2020
- Third estimated tax payment – September 16, 2020
- Fourth estimated tax payment – January 15, 2021
Important Things To Know About Paying Taxes In 2020
Here are a few things you should know when it comes to paying taxes in 2020:
The minimum on which you have to pay taxes in 2020 – You will have to pay freelance taxes if you earn $400 or more from freelance work during this financial year.
Keep track of your income and expenses throughout the year – Keeping track of your income and expenses throughout the year can save you a lot of heartache when tax season comes around. When you leave it until the last minute, there is a higher likelihood that you will leave out a major expense or income resulting in you paying far more than you should. The best way to stay on top of your income and expenses is to have a proper filing system in place. Keep a record of all the money you receive as soon as it’s in your account in one file and save all your expense receipts in another file. You’ll be surprised at the difference this simple strategy can make.
Use technology to your advantage – With so many different types of budgeting apps readily available these days, a lot of it which are free, there’s just no excuse not to use one to track your income and expenses. Take the Hurdlr app for example. In addition to tracking all your income streams, Hurdlr also helps you get real-time tax estimates, reminders and more to make your life easier. Shoeboxed is another app that helps you keep track of your receipts so you have it all in one place when it is time to file taxes.
When you can and cannot claim for tax deduction for your home office – If you work from home, you may be eligible for a tax deduction if you can show that you have a home office which is your principal place of business. You must also be able to show that the office is being used exclusively for business and is not being used as a family room, or any other purpose. You may have to provide photographs, detailed descriptions and measurements to back your claim.
Know the limit to meal deductions – Like all other taxpayers, freelancers too are eligible for meal deductions. There are limits however and it’s important to know what that limit is so you don’t over-indulge only to get a rude shock at the year end. You cannot claim deductions on every Sunday breakfast you have at McDonalds. Only dining bills that are considered a business expense are deductible. This includes meals related to entertaining or meeting with a client, or when traveling overnight for business which are eligible for deduction. That too, you can only claim 50% of the total cost of the meal.
Calculating Freelance Taxes
With full-time employees, a fixed amount is deducted by your employer towards taxes every month. Because a full-time worker typically earns the same amount month after month, calculating and paying taxes is fairly straightforward.
It’s not as simple for freelancers because of several reasons. For one thing, freelancers receive money from several different sources. Secondly, they rarely earn the same amount every month. A freelancer’s income varies from one month to the next. These factors make the calculation quite complicated with a lot of scope for error. Making a mistake could cost you a considerable amount by way of excess taxes.
Another area where many freelancers make mistakes is with regards to claiming deductions. If you are a freelancer, you can claim deductions for all expenses that are necessary for operating your business. This includes the cost of computer equipment and software, rent of your home office, advertising and marketing, travel and business meals, and office supplies.
Should You Hire A Professional To File Your Tax Returns For 2020?
Unless you are 100% sure you know what you’re doing, it’s worth hiring a tax professional to help with filing your returns. Tax professionals are experts in this field. They will take the time to understand your unique circumstances and make sure that you get the full benefits of the tax deductions that you are eligible for in 2020. This can make a significant difference in lowering the amount of tax you pay. The important thing to remember is that a tax professional can calculate your tax returns accurately only if you have all the necessary information handy.