As a freelancer, taxes can be a tough responsibility to handle. Between tracking your business finances, filing the right tax forms, and paying what you owe, taxes are a lot of work. But planning ahead and knowing your basic tax obligations is not too big of a challenge to wrap your arms around.
Follow along to understand what you have to do for taxes as a freelance to ensure you don’t accidentally mess up and break the rules.
Quarterly Estimated Taxes
When working as a full-time employee, your employer withholds a portion of your earnings every payday for your taxes. Also, they match a portion of that tax payment at their expense. This withholding covers your entire tax obligation. Depending on how you filled out your W-4 when starting your job, you may end up owing or getting a refund during tax season.
Freelancers don’t have an employer to withhold those taxes, so the IRS requires you to estimate your tax payment each quarter. Be sure to submit your quarterly estimated taxes on time each quarter to avoid penalties, fees, and interest from the IRS. For most freelancers, that estimate is going to be 25% or 28% of your total income plus payments for Social Security and Medicaid, sometimes called FICA taxes.
Make a Schedule C for Your LLC or Sole Proprietorship
At the end of the year, your business is required to file a tax form telling the government how much your business earned and spent over the course of the prior tax year. For single member LLCs and sole proprietorships, this is reported on a form called Schedule C. Even if you are not a registered business; you still have to complete and file a Schedule C if your company earned any money during the prior tax year.
A Schedule C is a relatively simple form, but the numbers behind it can be complicated. That’s why it is important to use bookkeeping software to track your business revenues and expenses throughout the year. Refer to your company’s profit and loss statement, also known as an income statement, for the information needed to complete your Schedule C.
File a K-1 for Your S-Corp
If you operate as a partnership or S-Corp, you can skip the Schedule C but still have to file another tax form. The business is required to provide each member of a partnership or each shareholder of an S-Corp with a K-1 at the end of the year.
Creating K-1 forms is easy for some businesses, but can be very complicated depending on your business model and ownership structure. As an owner of a two member LLC, I manually completed K-1 forms for myself and my partner. As the proprietor of an S-Corp, I used an online tax preparation app to create my K-1 form.
LLCs and S-Corps Pass Through to Your 1040
Regardless of what type of business structure you use, the government wants its cut. Virtually every American who earns money is required to file a 1040 during tax season to report their income and pay their taxes.
If you file taxes with a Schedule C, that Schedule C is just an addition to your 1040. It is included with your personal tax filing. If you operate as an S-Corp, you are required to file the K-1 forms with the IRS and then again on your personal taxes. No tax payment is due when you file your K-1 directly. The taxes are included in your personal tax payment. There is another option to operate as an LLC but pay taxes as an S-Corp. This situation gets a little more complicated but essentially works similarly to a Schedule C and a K-1.
Either way, as long as you are not a C-Corp, your taxes “pass through” from your business to your personal tax return.
Software, Accountant, or DIY?
When it comes time to prepare and file your taxes, you have three basic options. If you enjoy using a calculator and reading tax code, you can manually fill out your tax forms and submit to the IRS. But there are two much better options for most freelancers.
The first option is to file yourself using tax preparation software. There are programs you can download to your PC, websites to prepare and file online, or mobile apps you can use in some cases for simpler returns. These apps are easy to use, relatively inexpensive, and ensure you prepare your taxes correctly. Just follow along and enter your accounting info into the various forms, click submit, and you’re all set.
If doing your taxes is an onerous endeavor, you can hire an accountant to take care of your taxes. You have the option to go with a local accountant, someone you work with online, or an app that connects you to a tax professional for a fee.
I had an accountant prepare and file my taxes from the time I got my first job in 2001 through 2013. After my accountant had made several costly errors, which I was lucky to catch while reviewing before my taxes were submitted, I realized I know more about my finances and my business than anyone else. I could also save about $400 per or more year doing it myself instead of paying the accountant. I used accounting software for the last two years, but since switching from an LLC to an S-Corp, I am considering going back to an accountant for this year’s tax return.
There is no right or wrong, just what is right or wrong for you. You are free to change your tax filing method each year until you find something you like. You can also change if you had a bad experience like me or just want to go with something or someone new.
Save Cash and Stay Ahead of Deadlines
To ensure you are successful filing your taxes, you should take two big steps every year. First, try to save 30% of your income every time you get paid for taxes. I use a business savings account and transfer 30% over each time I pay myself so I am all set for my quarterly estimated taxes and annual tax return.
Second, always try to stay ahead of the deadline. Waiting in line at the post office on tax day in April is stressful and unnecessary for most freelancers. Instead, be proactive and file early. That will ensure your taxes are in on time and it is a low-stress experience.