When I first started making money through freelance writing, the only time I thought about tax management was in April. Like many other newly minted freelancers, I thought I was supposed to file my taxes the same time as regular, W-2 filing employees. It wasn’t until five years later that I realized that doing freelance taxes this way was costing me more than it should. Want to avoid the same mistakes I made? This checklist will help you figure out how to tackle quarterly taxes as a freelancer.
Mark Your Calendar
So, when are freelancer taxes due, exactly? Here are the four tax due dates to remember for 2018:
- April 17: First quarter taxes are due for January 1 to March 31.
- June 15: Second quarter taxes are due for April 1 to May 31.
- September 17: Third quarter taxes are due for June 1 to August 31.
- January 15, 2019: Fourth quarter taxes are due for September 1 to December 31.
Determine Your Estimated Tax Payments
When estimating your quarterly payments, the IRS recommends that you start with last year’s income and adjust as necessary from there. But beware: The IRS (and state governments) can impose penalties for late payments, underpayments and overpayments. How can you ensure you’re on the right track? “Generally, most taxpayers will avoid [the underpayment] penalty if they either owe less than $1,000 in tax after subtracting their withholding and estimated tax payments, or if they paid at least 90% of the tax for the current year or 100% of the tax shown on the return for the prior year, whichever is smaller.”
Once you’re ready to begin, fill out the 1040-ES form. This worksheet will help you determine your taxable income. This amount should be roughly the same each quarter. Unless you unexpectedly made more money than usual during a given time frame throughout the year, you can divide your estimated annual taxable income by four (and submit that amount as your quarterly payment). If, however, you do experience a major shift in income during a given quarter, you will need to adjust your payment accordingly. For further guidance, consider leveraging tax software programs or seek the help of an accountant.
Review Your Tax-Deductible Expenses
What’s one of the many benefits of freelancing? You can deduct more business expenses than the average W-2 worker. Here are just a few examples:
- Business travel: Did you combine your family vacation with a few business meetings or a conference? You can still write it off. Just make sure to only deduct business-related costs.
- Your car: You can deduct 53.5 cents per mile for business-related driving.
- Your home: If you work from home, then you can deduct any home expenses that are directly related to your business. For example, you may be able to deduct a portion of costs related to utilities, repairs and insurance.
- Business meals: You can write off 50 percent of a business meal with current or potential clients.
- Necessary software: “Any ‘off-the-shelf’ computer software that (a) is not custom designed, and (b) is available to the general public is qualified for the Section 179 Deduction in the year that you put the software into service.” Examples may include graphic design, writing or photo editing software.
- Subscriptions: You may deduct the cost of trade, technical and professional journals that are directly related to your field.
- Equipment for your business: Did you buy a new work laptop after you spilled your drink all over your last one? That’s deductible, too.
- Advertising costs: You can deduct reasonable expenses related to any form of paid advertising you use to boost your business and draw in clients.
- Retirement: Did you contribute to your self-employed Individual Retirement Account (SEP-IRA)? If the answer’s yes, that’s a deductible expense.
- Donations to charity: Your kindness pays off in more ways than one when you make a simple, tax-deductible donation.
Pay Your Quarterly and State Income Taxes (and Start Planning for Next Time)
Once you know your estimated tax payment for the quarter in question, you can submit your payment by phone, through the Electronic Federal Tax Payment System or on the IRS2Go app. In order to better prepare for next quarter, consider developing a process for devoting 30 percent of each paycheck to a savings account set aside for taxes. To make things even easier, you can use an automated service that helps you save and pay for taxes.
But what about your state income taxes? Since the percentage of your salary that’s dedicated to these taxes depends on which state you live in, get familiar with the tax guidance your own state government offers. While eight states have flat tax rates on income, seven don’t impose any state income tax at all. The remaining 36 states require “that your income be taxed in various brackets at different rates that increase as your annual income increases.” Take a look at your state government’s website for more information on how to pay your state income taxes.
Don’t let quarterly taxes get you down. Instead, plan ahead and come up with a tax management strategy that works best for you and your indy lifestyle. Doing so will give you more time to focus on what really matters, your business.