Tax Tips for Freelance Professionals
What Independent Contractors Need to Know When it Comes to Taxes
Freelancers are in full control of their financial and tax situation, though independence comes at a cost. Independent contractors face higher taxes and more record keeping duties than employees. There are special circumstances that apply to freelance writers and other independent professionals, so I will highlight what you need to know so you not only feel like a confident independent professional but also confident in understanding and preparing your taxes.
Taxed as an Independent Contractor
The basics of tax planning for self-employed persons begins with understanding how they are taxed in the first place, which is substantially different compared to how an employee is taxed. Independent contractors are taxed on their net self-employment income. By net self-employment income, we mean a freelancer's gross receipts minus any tax-deductible business expenses. This net amount is then taxed twice. Once for the regular federal income tax and a second for the self-employment tax. This self-employment tax functions pretty much like a flat tax, except it caps out once earnings reach $118,500 for the year.
Both taxes are calculated based (at least in part) on a freelancer's net earnings -- after business deductions. Thus business deductions play a significant role in helping a freelancer keep her or his federal taxes under control.
Tax Planning Strategies
Self-employed persons generally do not have taxes deducted from their pay. It is important to plan for and budget tax payments. Freelancers can send in tax payments throughout the year. We do this by sending in estimated taxes. The benefit of paying estimated taxes is to prevent a cash crunch in April since any final tax payments are due by the April 15th tax deadline.
A typical tax planning strategy for freelancers begins by keeping track of income and expenses, calculating estimated taxes, and then making any financial decisions that might reduce taxes to a desired level. After considering deductions and estimated taxes, a freelancer can fine-tune their tax planning by through their choice of retirement plan and optimizing their depreciation methods.
More Tax Resources for Freelancers
For more resources dedicated to helping freelancers and independent contractors file taxes, we have compiled a series of great resources that cover everything from how to get organized to protecting against business losses. Read the articles below to learn what you need to know about filing income taxes as a freelancer.