Freelance Taxes 101: The Beginner’s Guide to Handling Your Cash

Freelance Taxes 101: The Beginner’s Guide to Handling Your Cash
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It wasn’t until I was seated across from my accountant, an April tax deadline looming, that I realized being my own boss required a little more paperwork than I anticipated.

Transitioning from a full-time career to freelance writing was an exciting time for me. The idea of leaving behind an office environment to set my own hours and decide my daily direction was a natural next step in my career.

But as thrilling as the move was, I forgot one of the most important considerations for any independent contractor: taxes.

I was the first among my friends and family to enter into the realm of self-employment and admittedly, did little research. I filled out all the necessary tax forms, kept track of my contracts and saved all the invoices, but in the rush of racking up new clients and the excitement of beginning something new, I overlooked a number of ways I could have saved money.

Though I made it through my first year of freelancing without the nightmare of an unexpectedly large self-employment tax, it did bring plenty of headaches and served as a major lesson for my self-employment path going forward.

Whether you’re beginning a freelancing career or preparing for your first self-employed tax season, here’s some of what you need to know about how to file taxes for freelance work.

What’s So Different About Independent Contractor Taxes?

Whether or not you need to file taxes as a self-employed individual is determined on an individual basis, according to Joyce Gardner of Gardner’s Tax & Financial Services, Inc. in New Castle, Pennsylvania.

“Facts and circumstances for each individual would dictate whether they’re making enough to file,” she said. “We would suggest the taxpayer consult an accountant to determine, as situations could arise that would make filing a return beneficial even though it was not required.”

Plus, the type of entity you form will determine what paperwork and tax forms you’ll need to fill out. Gardner suggests discussing this with legal and accounting professionals before you begin self-employment. Knowing what to expect as a self-employed individual with regards to tax season and finances is an important first step in the process.

“Most individuals don’t realize that half of their Social Security and Medicare tax is paid by their employer. When you are self-employed you are paying the entire amount,” Gardner said. “Making estimated tax payments may be required, and there is no longer anyone maintaining a retirement account for you.”

With those expert considerations in mind, here are some of the ways you can better prepare yourself for filing self-employment taxes.

Get Help

Some first-time freelancers might be brave enough to face tax season alone, but I highly recommend finding a certified public accountant. You can easily find local accountants online or ask your fellow freelancers for recommendations. I found mine by asking a photographer I worked with, who was also self-employed.

There’s no downside to seeking professional help either, as any professional resource you use to file your taxes can be counted as a deduction (more on those in a minute). The cost of professional help will vary depending on how long it takes to complete your return.

There’s nothing wrong with using accounting software or filing independent contractor taxes on your own, but an accountant can help newbie freelancers understand the tax process going forward.

I decided to work with an accountant because I had more questions than answers when it came to filing. I chose writing as a career because I’m terrible with math, and thankfully my accountant takes care of all the numbers. He helped me find deductions, set up quarterly payment schedules and ease my worries going into next tax season.

Seek out an expert to help in unfamiliar areas as soon as possible, Gardner recommends. And stay in touch with your accountant throughout the year.

“This allows you to ask pertinent questions as you go along and address issues before they become problems,” she explained.

Stay Organized

As a new freelancer, I didn’t create a designated place for all my paperwork. Contracts, invoices, and any receipts I kept were scattered throughout my car, desk and wallet. So when it came time to gather all my materials and file my taxes, I had a hard time finding everything.

My lack of organization is one of the biggest mistakes any self-employed individual can make, as Gardner says keeping good records is crucial.  

We all have our own methods of organization, but here’s what works for me. I have a “freelance” folder on my laptop, and within that folder is a folder for each client, where I keep that client’s contracts, invoices and any relevant receipts. I scan and save any physical invoices in the appropriate folders, and keep the physical copies in a tray on my desk.

To track invoices, I keep a spreadsheet on my computer that lists payouts, when I sent the invoice and how much I billed. Not only does my method keep me organized for tax season, it helps me keep track of the money I have coming in and out from my clients.

For first-time freelancers, I suggest creating a designated folder to hold all of your paperwork, whether it’s digital or physical. If you’re unsure whether something might be important, keep it until you can consult your tax professional.

Know and Track Your Freelance Tax Deductions

Think twice before you toss away any receipt related to your work.

Tax deductions, expenses incurred as a result of your business, are one of the most important parts of self-employment taxes. The IRS details what can be considered a business expense, but it’s important to keep receipts as proof.

The sooner you start tracking these expenses, the more likely you are to see a refund come April. Here are some common freelance tax deductions to consider.

For example, if your self-employment requires driving, you can choose to make a deduction based on either mileage or on vehicle maintenance costs.

In my first year of freelancing, I traveled extensively but wasn’t aware mileage could count as a deduction. I didn’t begin keeping track of mileage until late in my first tax season — which means I missed out on those deductions.

Don’t wait until tax season is closing in to begin tracking your mileage or considering what may count as deductions. Instead, keep a notebook in your car and log your travels. Take the notebook with you everywhere and use it to hold receipts and paperwork during your days away from the office.

If you prefer a digital way of tracking mileage, use your smartphone’s note-taking app and log mileage at the beginning and end of every trip, or look into mileage-tracking apps like MileIQ.

Start an Emergency Fund

Starting an emergency fund is something that even non-freelancers should be doing, but it’s of particular importance in this career path.

Depending on the type of freelance work you do, the number of jobs and clients you have can fluctuate from month to month. Additionally, not all clients pay on time, every time. In my first foray into freelancing, I made the mistake of not accounting for these factors, and some months I didn’t have the necessary funds to pay my basic household bills on time.

Based on my accountant’s advice, I began to take 20% from of each of my freelance checks and set it aside in a savings account, separate from my personal account.

I vowed not to touch those funds unless it was an emergency, and when it came time to pay my quarterly taxes. Each quarter, the fund was enough to pay my tax fee and have a few dollars left over for emergencies.

Separating my emergency funds from my daily funds prevented me from spending that money and helped tide me over during months when I didn’t have as much work. If you need a little extra help, apps like Digit and Mint can help you budget, figure out how much to set aside and keep you on track.

Ready to File Those Independent Contractor Taxes?

Now that you’re a little more aware of how freelance finances work, you’re ready to get down to business.

Whether you seek professional guidance or take on taxes on your own remains up to you, but as you gain more experience in your career you’re sure to find ways of handling your cash that work for you.

Your Turn: Freelancers, what challenges did you run into while filing your taxes? Share your stories in the comments!

Lauren Rearick is a freelance writer living in Western Pennsylvania. She’s written for Reader’s Digest, Travel + Leisure and more. You can find her at laurenrearick.com.