Updated: April 28, 2020
This article is from one of my business partners in the US who would like to share how freelancers file tax returns on their side of the world.
I will soon be writing about how Filipino freelancers can file their taxes, but for now, here’s my good friend Robert.
There’s a lot to love about the life of a freelancer. Without a set schedule, you could potentially decide to live your life free of the alarm-clock, the constrictions of business attire, and the need to commute every morning.
Beyond that, a freelancer, you get to choose who you work with, and work at your own pace. You could even take off for an afternoon nap if you’re having a particularly bad day.
The only real negative about being a freelancer, is that you have to deal with your own taxes. Understanding and filing taxes can be incredibly complex, and it’s important to make sure you know which taxes you’re required to file, what the income requirement will be and so on.
Also, do you own an LLC? Natalie Cooper of BankingSense issues a reminder: “It may be necessary to file both a corporate and personal income tax return each year.”
1. Work with a Tax Professional
It is important for freelancers to make sure they work with a professional accountant. It’s true that a marvelous accountant can be a costly investment, but they can also save you a lot of time, money, and stress.
If you don’t understand tax law and how your returns should look, you’re taking completely responsibility for what you file.
What’s more, a professional who specializes in doing taxes for the self-employed could know ways you might save money on taxes in your profession.
2. Know How much You need to Pay
If possible, try to develop a basic understanding of which taxes you will need to pay, so that you don’t feel as though you’ve jumped straight into the deep end when getting started.
Once you become independent, you will be responsible for your self-employment tax, which will include Medicare taxes and social security which some say is a Ponzi scheme and must be reformed but nevertheless you still have to pay into the system even if it is currently broken.
If you were in a full-time job, then the chances are that these payments would have been automatically taken out of your paycheck. However, as your own employer, you also have to pay the share your employer was paying for you, as well as self-employment tax for your state.
If you don’t have an accountant, and you can’t figure out how much you need to set aside, a fine rule of thumb is to start with 30%. Although the actual amount you may need to put towards your taxes could be lower or higher, you will still be in the right ballpark as you search for an accountant.
Your taxes could be less than 30% of your complete income if you have a lot of business expenses, are married, own a home, or have children.
3. Know what You can Write Off
The IRS dictates that individuals can deduct expenses for their business which are defined as “necessary” or “ordinary” within their chosen industry.
This means that you need to determine, as a self-employed tax payer, which expenses will be reasonable in your industry. For example, a model’s business is based on how they look, so they will need to maintain a marvelous and decent appearance. Because of this, they may be able to write off cosmetic expenses that wouldn’t be accepted for a car mechanic.
Your accountant should be able to explain which of your expenses can be written off, and you should also be able to find more information with professional associations, the IRS website, or again, just by speaking to your accountant.
This article is contributed by Robert Sonder from Washington.
What to do next: Click here to subscribe to our FREE newsletter.