Tax Filing Status: 7 Tax Tips Every Freelancer and Independent Contractor Should Know

Being a freelancer or an independent contractor has its perks. You set your own hours, you can work in your sweatpants on your couch, or you can take your laptop on vacation and get things done in a lounge chair by the pool if you desire. However, a simple tax filing status is not one of those perks. When tax time rolls around, things can get more complicated. If you haven’t planned ahead, you may end up with a big bill.

If you work as a freelancer, the IRS considers you to be self-employed. That means, if you earn income as a freelancer, you must file your taxes as a business owner. Although there are additional deductions available to self-employed workers, you also have to pay self-employment tax in addition to your income tax.

If your annual net earnings for the year are $400 or more, you are required to pay self-employment tax according to the IRS.

Here are seven tips to help the self-employed navigate their taxes this year.

This is one of those things that sounds simple but can be difficult depending on your organizational skills. You want to have a record of every receipt for business expenses.

You can save all of this in a file, but because paper can fade or get damaged, you might want to invest in a scanner or use an app that allows you to scan items on your phone, such as Genius Scan. This way you can keep all of your records in the cloud.

Melinda Kibler is a Certified Financial Planner and client service and portfolio manager with Palisades Hudson Financial Group’s Florida office. She explains that when you are an employee of a company, Social Security, and Medicare taxes are typically figured by your employer.

“When you are an independent contractor, however, this becomes your responsibility, and you must pay both the employer-equivalent and employee-equivalent portions, using Schedule SE to calculate. However, you can also take a deduction for the employer-equivalent portion of your self-employment tax when figuring your adjusted gross income,” she adds.

Kibler says that, if you are self-employed and expect to make more than $1,000 for the year, it is also your responsibility to make federal estimated tax payments since there will not be any tax withholding on your income.

She says, “These payments are due April, June, September, and January 15 of the following year. You may have to pay a penalty if you do not meet the estimated tax requirements throughout the year. The IRS requires you pay 100% of the tax shown on the prior year return, or 110% of the prior year tax for high-income taxpayers, or at least 90% of the tax for the current year. If you live in a state that taxes income, you may also need to pay state estimated taxes depending on their rules.”

Paul Jacobs is a Certified Financial Planner and chief investment officer of Palisades Hudson Financial Group’s Atlanta office. He recommends deducting health insurance premiums.

“While most typical employees can’t deduct medical expenses, including insurance premiums because the tax threshold is so high, self-employed business owners can treat insurance premiums as a business expense and use the cost to offset income. As health insurance premiums continue to rise, this deduction just becomes more and more valuable,” says Jacobs.

Gail Rosen is a partner of the mid-sized CPA firm Wilkin & Guttenplan, P.C., and she has worked with both individuals and businesses for almost 40 years. She advises trying both the standard and actual method for auto expenses to see which one is better for you. This is how they work:

Standard Method: In 2017, it is 53.5 cents per business mile plus tolls and parking.

Actual Method: Add up all actual automobile expenses and then multiply it by your business percentage (business miles/total miles for the year).

Rosen says,”Remember, you save a lot of money if one method is better than another. However, there are restrictions on switching between methods after the first year.”

Note: Home office businesses have a tax advantage because the minute you walk out of your home, the miles are deductible business miles, explains Rosen. However, if you have an office, the commute to the office is not deductible.

To take the home office deduction, Rosen says the business space you deduct has to be used strictly for business purposes. If you are renting an office elsewhere, you most likely won’t be able to claim a home office.

She adds, “The IRS simplified the home office deduction and is giving you the option of using the ‘safe harbor’ rule to calculate your home office deduction.” To calculate using the safe harbor method, multiply the square footage of your home office by $5 (for a deduction of up to $1,500).

Again, Rosen recommends comparing the safe harbor method with the actual method to see which one generates a better deduction. “You can switch each year which method you choose for the home office deduction,” she says.

If you’re self-employed, you can deduct any travel expenses if the travel is for your business. So, keep track of everything when your trip is related to your business. Keep (and scan) airfare costs, restaurant receipts, hotels, etc. It’s all a write-off.

Noel Dalmacio of Dalmacio Accountancy corporation suggests you put as much as you’re able to into a retirement plan or plans. Because money put into retirement accounts isn’t typically taxed until you withdraw it, it can save you a lot in taxes.

He explains that you can put up to $18,000 in a 401(k) (and an additional $6,000, if you are 50 or over). “Also, you can contribute up to 25% of your salary to a profit-sharing plan. Your overall contribution limit is $54,000 ($60,000 if you are 50 or over).”

When you’re self-employed, it can be difficult to figure out your taxes. A good tax preparation software may be all you need. However, accountants and tax preparers are much better at finding deductions and tax credits and can quickly pay for themselves. If you are struggling with tax debt, consider hiring a tax relief firm. Focusing on your business and hiring professionals to figure out your tax problems can be a smart choice for busy entrepreneurs.

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