Doing Taxes as a Freelancer: How Does it Work?
It’s finally getting warmer, and summer is just around the corner! There’s just one thing standing in between us and hot girl summer… Tax season.
Tax season is incredibly stressful, especially if you’re a freelancer. It’s super fun to create and design a biz on your own terms, but it does come with the challenges of filing taxes as a sole proprietor. Between sending out 1099’s, tracking deductibles, and gathering all the paperwork for your business’s finances throughout the year, it’s enough to make even the most organized person’s head spin.
As a creative studio that started out as a one-woman biz (shoutout, Denitza!), we know a thing or two about tackling tax season as a freelancer. We want to be clear that we are not accountants, so take our advice with a grain of salt. But we do have some tips to share based on our experience with tax season!
Keep reading for some of our own experiences and tips for tackling tax season with ease!
Pros and Cons of Filing Taxes as a Freelancer
Yeah, we know. It sucks to pay taxes, and that can be the thing that turns many people off to freelancing in the first place. But there are upsides to filing as a freelancer, too! Here are some pros and cons:
You can deduct any business-related expense that the tax law allows. We’ll talk about this more below.
You don’t have to pay all your taxes at once. You can pay them throughout the year. The IRS provides dates to pay taxes each quarter, so check their website to stay informed.
You may pay less taxes overall. It’s better to owe the government money than have them hold onto your money throughout the year. Because of this, freelancers often end up paying less taxes than employees who earn a similar income.
You must keep track of every business expense. Owning a business means that you need to keep track of what you’re spending. It can help to use an accounting software or even have a separate business credit card.
You may get confused if you are full-time and freelance. It’s hard enough to have to file taxes as a freelancer, but it can get even more confusing if you need to file 1099’s and W-2’s.
You must pay all of Medicare and Social Security taxes yourself. Because you are both the employer and the employee, you have to pay both sides of these taxes yourself. This is known as the ‘self-employment tax.’ Womp, womp.
You are responsible for paying for your own health insurance. But you can count this as a deductible.
Questions to Ask Yourself Before You File
Do I qualify as a freelancer?
Freelancing is a word that is thrown around quite a bit these days, but what does it take to qualify as a freelancer in the gov’s eyes?
It really doesn’t matter whether you’re working for yourself full-time or working for another biz as a side hustle. As far as the government is concerned, the terms ‘freelancer’, ‘self-employed’, or ‘independent contractor’ all mean the same thing. You are either a full-time employee of a company or you’re not.
What documents do I need if I’m filing taxes as a freelancer?
You will mainly need three documents when filing your taxes: a 1099 form, income statements, and records of expenses.
A 1099 form is a tax record that is filled out to report any income that doesn’t come from a full-time employer. This is where you’ll report how much you made throughout the year from your creative biz.
So, what’s the main difference between filling out a W-2 and a 1099? Well, there’s a lot (taxes are obvi complicated), but the main difference is that they tell a different story regarding employment status and taxes.
With a traditional W-2 form, your employer withholds Medicare tax and Social Security tax from your paycheck. You’ll see this on your paycheck and then again when you get your W-2 at the end of the year.
When you’re self-employed, you need to pay Medicare tax and Social Security tax yourself — as the business and as the employee. If your net earnings from freelancing are $400 or more, then you’ll pay a self-employment tax of 15.3%.
How much do I need to set aside for taxes?
It’s best practice to set aside 25-30% of your self-employed income to pay for taxes.
Let’s Talk Deductibles
When you’re filing taxes as a freelancer, you want to take advantage of as many deductibles as you can. Deductibles are expenses for your business that you can write off to minimize your taxable income. This will help you shrink your tax bill and justify spending a few extra bucks on that pink calculator.
So, what exactly are you allowed to write off? Think back to that amazing scene from Schitt’s Creek, and let’s go over some expenses that you can list as deductibles:
Software programs & other subscriptions: You can write off any subscriptions that you use strictly for your business. That includes Adobe, DropBox, Canva, and any other programs that you use to make magic for your biz. Your Spotify account will likely not cut it in the eyes of the IRS.
Office supplies: Any supplies that you need to buy for your biz are deductible expenses. That includes stationary, tools, electronics, or any items that you purchased to work on your business projects. That new purple Mac desktop to match your office decor? Write off, baby.
Business trips: Transportation, lodging, and meals while you’re traveling for business. *crosses fingers for a business trip to Miami*
Parking: Do you need to pay for parking for your office? Consider it a business expense.
Professional development: If you attend any conferences or pay for online courses to improve your professional skills throughout the year, you can write it off. Grow baby, grow.
Wifi/Power/Water bill: If you work from home, you can write off a portion of your utilities as business expenses. But make sure that you only deduct the energy/water/wifi that you use during your business hours.
Filing taxes as a freelancer doesn’t have to be as stressful as you think.
When it comes to tax season, organization is everything.
Keep track of everything in an organized filing system so that you can pull everything out when tax season rolls around. At Ouu I Love, we use the ‘scan documents’ feature on our iPhone to convert all paperwork into a PDF. That way we can easily store it in our system. No matter how you choose to keep track of your paperwork, make sure that your system is organized and makes sense to you and your team.
In conclusion, staying organized throughout the year will set you up for smooth sailing come January. And if all that is still too complicated, you can always hire a tax professional. That’s what they’re there for.
Reach out to us on our Insta at @ouuilove if you want more tips about staying organized for tax season as a creative biz!