Taxes for Freelancers

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Filing taxes as a freelancer isn’t always more complicated than working as a full-time employee. Here are the things I wish someone talked to me about when I first started freelancing 

The most basic knowledge of filing taxes

  • If you are a sole proprietor or a single-person LLC, you’ll file a single tax return.

  • If you are a S Corp or a C corp, it gets a little or a lot more complicated as you have a personal and a business tax return to file. 

Do you need an accountant?

Yes, I think so. I’m the queen of DIY and I certainly tried to sort out business taxes on my own. Weeks later, I realized I was still reading the instructional PDFs. Not a great use of any business owner’s time! Conclusion - find an accountant you like, get a referral from family or friends for at least the first 2-3 years of your freelance career. A good accountant will ask you the right questions to set you up for success. After year 1, you’ll have a much better idea of what you need to do moving forward.

The cost varies depending on the nature and location of your business. Accountant fees can range from $300-1500 dollars from my experience. If you are a sole proprietor or single-person LLC, the cost is usually quite affordable.

Plus the accuracy of your revenue and profit is important for freelancer’s retirement plan, which we will cover in a future episode soon.

All that legal stuff aside, it’s important to understand that you have many more deductions as a freelancer compared to being a full-time employee 

The main deductions for freelancers are: 

  • Advertising marketing (Facebook, Google Ads, etc)

  • Office supplies

  • Computer equipments, software

  • Travel and business meals

  • Home Office / Rent for a cowering space

  • Utilities

It’s really important and will make your life much easier to have a separate business account 

If you are already with a major bank for your personal banking, just give them a call or walk into a branch and set up a business account. As for me, I simply have a business checking account.

You want to avoid having to separate personal and business expenses each quarter or before filing taxes. It also raises a flag if you mix personal and business accounts.

Simple decision and doesn’t cost you anything. Go ahead and do it!

Credit Card Perks for Business Expenses  

There are additional savings you could gain from putting money away in your retirement account such as a Sep IRA, Simple 401K. We will talk about them in greater details in upcoming episodes.

As a business, there are many more expenses you have to charge to your business as mentioned above. The easiest thing to do once again is to open a credit card dedicated to business expenses such as travel, office supplies, software purchases, hardware upgrades, etc.

Please allow me to reiterate: you do not want to use the same credit card for both personal and business expenses as it’s really messy and time-consuming to reconcile the line items later on.

My favorite credit card so far for business is Chase Reserve. I’m not an affiliate, and you can read more about this card on NerdWallet.

Chase Reserve has a higher annual fee (but it’s worth it). You can most of it back almost immediately through travel credits and other perks. But if you prefer a lower annual fee, here’s Chase Preferred.

Why do I care about credit card perks? With a business, your spending is higher and more consistent than personal spending (that is if you are an average 20-30 year old single or couple).

If you have a larger business and multiple employees, good credit card perks will make an even bigger difference if it’s done right.

Quarterly Estimated Tax

If you are freelancing on a full-time basis, you are required to file quarterly. 

Quarterly means you generally have about two weeks after each quarter ends to file. For example after Q1 (March 31st), you have until April 15th to file. 

Have I always done that? Hmmm, not really. There’s a small penalty. It’s a good practice not file quarterly if you are someone who don’t like to set money aside for tax purposes. 

It’s recommended that you set aside 25-30% of every paycheck in a separate savings account. (If you are making well into six figures, talk to your accountant as you may need to set aside a bigger portion for taxes later)

You are responsible for 15.3% of self employment tax when you freelance, this tax exists to cover your social security and medicare taxes. 

Listen, if you are deep into 6 figures, or approaching 7 figures, you’d better set aside a bigger portion. 

Tax Software

I’ve been using TaxAct for ages now. Each year, TaxAct pulls in tax information from the previous year as a benchmark which I find helpful.

They have multiple versions of the software you can choose from based on your needs: (I have always used the Self Employed version)

In the next episode of How to Freelance mini series, I will discuss incorporation and whether it’s a good idea for you. 

In future episodes, we’ll cover retirement plan options for your own business (whether you are a soloprenuer or with employees). It’s yet another great way to save on taxes!

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