How hard can it be to prepare your self-employment taxes?!

Friday, May 7, 2021

On April 29, we had Burcu Manay as our first guest on the Freelance Hub club and talked about Self-employment taxes for freelancers. Here are some highlights from our conversation that every freelancer should be aware of.

First things first: Compared to working for a company, where your employer is responsible for holding the right amount of tax from your income, including federal, income taxes as well as social security and medicare taxes, being a freelancer, you are responsible for allocating a portion of your income for paying all these different kind of taxes. So it would be best if you stayed on top of their income and expenses. Quarterly tax payments can make this process a bit easier; otherwise, you have to reconcile everything and pay the taxes at the end of the year.

Self-employment taxes consist of Social Security taxes and Medicare taxes, and they usually don't change. You have to pay 12.4% of every dollar for the former and 1.45% for the latter. When you add all of this up, it comes to about 15.2%, and that part is just for Sel-employment taxes. There is an upper limit for social security taxes, and it changes every year, which is $142,800 for 2021.

Quarterly tax payments are required, and there is a penalty if you fail to pay quarterly taxes. It usually changes between 3-6 percent. There may be an occasion where you can waive the penalty with a reasonable cause.

It is always a good idea to keep track of your business financials not only for tax purposes but also to watch how your business is growing compared to previous years. Doing so will also help you not getting hit with a significant amount of bill at the end of the year.

Itemizing your expenses helps you minimize your taxable income. It would help if you were careful about what to expense. The spendings you mark as a business expense has to be related to your business. Some of the ordinary business expenses could be your internet and phone bills, your mileage, or your car's depreciation if you are commuting for your work. Home office costs are also business expenses, but you must be careful about claiming that kind of expense. It would help if you had a designated area for your home for your office. If you are a musician or even a graphic designer listening to music to focus on your work, you can expense your Spotify subscription. Gym memberships are not a valid business expense if you are not a personal trainer or your job requires you to be fit and strong.

If you are working with a CPA, it would always be a good practice for them to check your last year's finances to ensure everything is good to go. If there are severe increases in your expenses compared to the previous year, that may be a flag for IRS to take a closer look at your numbers.

If you have more than one freelancing job, you have to file separate Schedule C forms because each of them is a separate business. They will also have different deduction points.

As a freelancer, you can pay for benefits that a company would offer, like health insurance or 401ks. These payments will be tax-deductible, and they are going to reduce your taxable income and, therefore, your tax liability.

Suppose you are using e-commerce sites like Amazon to fulfill your needs for your business like computers, materials & supplies. In that case, it will always be a good practice to categorize them as soon as you made those purchases. Otherwise, your CPA will probably ask you to clarify those spendings when they work on your file return. You should always keep receipts or records of your past purchases if you get audited; you may need to provide the details.

If you find this content valuable, follow our Freelance Hub club and stay tuned for our next guests and topics.

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