Did you know 38% percent of millennials freelance? That means twenty and thirty-somethings who work differently from their parents, also need to do their taxes in a very different way from their folks.
While freelancing offers flexible work hours, creative opportunities, and a level of independence, it also means having to become your own HR department. Although tax season is several months away, freelancers can start preparing now by organizing expenses, 1099s, and more. Check out these tips and tools to make your 2016 tax season a breeze:
Determine what kind of return you need to file. Are you a freelance business as an LLC, or are you an independent contractor? Or did you work as a W2 with staffing agencies like Artisan Creative? Make sure you find the correct forms to file based on your business, as well as corresponding state and local forms.
$600 or more means you need a 1099. If you earn $600 or more from any one client, you need to report that income on your tax return using a 1099-MISC form. So if a client has yet to send you these forms by February 2, contact them and request one.
You need to pay both income tax and self-employment tax. While this may come as a surprise to freelancers, you are essentially taxed twice — once as yourself, and once as a 1099 contractor. However, half of your self-employment tax is deductible as a business expense. If you haven’t set aside enough money to cover the cost of your taxes, start saving immediately so you can pay off at least some of your owed taxes. And if you determine you need to make estimated tax payments, make quarterly estimated tax payments on estimated income tax, including estimated self-employment tax.
Research tax breaks. The IRS offers a substantial number of tax breaks, which give freelancers a wonderful chance to get some additional deductions they’ve spent on their business. Deductions change from year to year, so look up common ways to determine your deductible expenses. For example, if you work from home, you can deduct the cost of your Internet bill, as it’s used while you work. Freelancers Union helps sort through this in its in-depth tax blog.
Set reminders. Do not wait until the week before April 15 to file your taxes unless you love stressing yourself out! Use calendars — from Google to iCal to the Sunrise app and more, there are plenty of online choices to keep track. Set aside enough time to complete a set of tasks, like determining deductions or adding up your total income or expenses from 2015. Filing taxes is a pain, but it’s an even bigger pain to do it under a tight deadline.
Organize receipts and expenses. To help maximize tax deductions and keep the IRS happy, it’s best to stay organized and keep updated records of receipts, expenses, and payments. Have all these things stored and easily accessible to reduce the stress of filing. For instance, if you’re creating a digital archive, Shoeboxed is a great app for storing, processing, and organizing pictures of receipts on your phone.
Get help from a seasoned tax professional. Because tax deductions change so often, it may be best to hire a CPA to help so you can take advantage and save money. NerdWallet is an excellent educational blog to help you make smarter financial decisions, and can tell you which tax breaks you’re qualified for. Just make sure if you hire a CPA, they are accredited and come recommended. The last thing you want is someone who’s untrustworthy handling your tax information!
Set yourself up for next year’s success. If you find that this year’s filing has been stressful, help take out some of the work for 2017 by setting yourself up to function more as an independent contractor next year. Create a separate bank account for your business to funnel payments through that account as well as pay any business expenses like insurance and tech maintenance through that account. Then use your organization system to keep track of receipts and such, as well as how much you think you’ll need to set aside to pay next year’s taxes.
With these tax tips, your freelance tax season will be the most time-saving — and money-saving — one you’ve had yet!