As a new freelance worker, are you ready for tax time?
Freelance work can be fulfilling in many ways, especially if you have the flexibility to create your own schedule. When it comes to filing taxes, though, even experienced freelancers can feel a little stressed.
In truth, reporting freelance income is a straightforward process. In most ways, it’s not much different from reporting income from an employer.
When freelance workers earn income, it should be reported on IRS form 1099, designated for payments made to independent contractors for services provided to a business. When filing 2020 taxes, freelancers will use form 1099-NEC, which replaces form 1099-MISC (box 7)
As a freelancer, businesses that you worked for throughout the year should send you a 1099 form to file with your taxes by the end of January in the following year. However, this does not always happen.
The most significant difference between the W-2 income employees of a company receive and 1099 income is that 1099 is not taxed. You’ll need to calculate and pay taxes based on your 1099 income each quarter, and whilst there are many income calculation worksheets in Excel available online, a dedicated app like Lunafi, is a much better solution.
Typically, freelancers bill clients, who have agreed to pay for a product or service in one of several ways:
As a freelancer, you could receive a paper check, a bank transfer, an electronic payment, or cash. Be sure to open and maintain a separate bank account to track your freelancing income and expenses. This makes tax preparation and profit tracking easier.
The IRS does not treat all 1099 income the same, and not all freelance work is paid by 1099. Here are a few rules and exceptions to keep in mind:
To determine how much tax you need to pay on your 1099 income, follow these steps:
1. Add up all your 1099 income. This is your gross self-employment income.
2. Deduct expenses from your self-employment income — keep careful track of these throughout the year!
3. The difference between these figures is your Net Earnings from Self Employment.
4. Net Earnings from Self Employment are subject to income taxes just like W-2 wages.
5. Additionally, you’ll need to calculate a 15.3% self-employment tax based on your Net Earnings from Self-Employment. This tax covers Social Security and Medicare.
As a freelancer, you need to file quarterly estimated tax payments. Don’t worry — if you overpay for one or more quarters, you can make adjustments to your payment at the end of the year.
Did you know that many of your expenses may qualify for deductions that can reduce your taxable income? You may be able to write off portions of utility bills, the money you’ve spent on office supplies, transportation costs, and many other expenses. Keeping track of these expenses via an income calculation worksheet in Excel, whilst possible, is time-consuming and often inaccurate. A much better solution is using Lunafi to calculate your estimated 1099 tax based on your income and business expenses.
Lunafi calculates your estimated 1099 tax based on your income and business expenses. Learn more and become a beta user today!
If you wonder what is schedule C on a tax return, read the basics of a Schedule C form for freelancers in this article.
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