Many workers are going into freelance work because it gives them much freedom and the opportunity to make extra money. In response to the pandemic, 53% of companies are willing to use freelancers, according to an Upwork poll of 1,000 hiring managers. This could lead to increased work for currently active contractors and the emergence of a new group of independent workers.
Working for yourself as a freelancer is thrilling. But it is essential to remember that it is not just about getting away from your employer and landing the customers of your dreams. A good approach to saving, cutting, and paying taxes as an independent contractor is among the many administrative tasks you must manage as a successful freelancer. Therefore, every independent contractor should be knowledgeable about freelancer tax obligations.
This guide discusses five tax preparation techniques for freelance writer taxes that might increase savings this year.
1. Create a Solid Plan for Tax Reduction
One of the best freelance writer tax tips is always to be prepared and get off to a good start. Choose and religiously adhere to a percentage to determine how much your earnings to reserve for taxes. Independent business owners should save 25-30% of their income each year, as personal finance expert Laura Adams recommends.
No one likes to be caught between freelancing and taxes by an unexpectedly high tax bill. You should put taxes away regularly to easily make quarterly estimated taxes and annual underpayments.
The tax on self-employed people may come as a surprise to many freelance writers. Fortunately, tax day can be less stressful if you plan.
Financial experts believe that one of the most typical errors freelancer creatives make is failing to recognize the enormous tax benefits certain tax codes offer through the corporate tax election. A freelancer’s annual income is typically hit hardest by self-employment taxes. Which require them to cover employee and employer payroll taxes (around 15.3%).
2. Visit the IRS Tax Center For the Self-employed
If you have not already, set aside some time to check the website and ensure you are current on the latest news surrounding passive income taxes and freelance writer tax forms.
3. Make an Appointment With a Tax Advisor
Do not put off making an appointment with a tax counselor. Particularly if this is your first year working as a freelancer, your income from freelancing has increased significantly, or if you have purchased a home or begun a family this year. These and other major turning points in one’s life frequently have tax repercussions. And a qualified tax advisor can offer ways that will cut down your tax liability.
In addition, the structure of your business affects your tax liabilities; this is true regardless of whether your freelance business is a sole proprietorship, an LLC, or a corporation. Talking things through with a reliable business advisor or accountant will ensure that your chosen structure will serve your purposes effectively.
Due to variables such as various income streams, assets, and the potential for greater tax deductions for freelance writers. Tax circumstances can become more complicated when a freelancer earns a higher income. Therefore, if your payment from freelancing will be large this year. Getting the advice of a professional as soon as possible may help you reduce the amount of taxes you owe in the future.
4. Ensure Stellar Recordkeeping
Investing early in reliable freelancer tax software might be beneficial at tax time, so keep that in mind. Software that interfaces with your company’s bank and external payment processors like Stripe or PayPal will help calculate the estimated taxes for freelancers.
Make it a monthly habit to reconcile your bank statements, ACH deposits, and checks against your accounting software. Accounts software such as Xero, GoDaddy Bookkeeping, Wave, and Quickbooks can assist a freelancer in rapidly and efficiently setting up their accounts.
Preserving these documents can help you to fulfill your freelance writer tax responsibilities as a 1099 contractor by making it easier to declare your profits to the IRS and your state revenue office. This data can also guide crucial business decisions because it details each year’s earnings and expenditure.
5. Understand Tax Deductions Thoroughly
There are several freelance writer tax deductions, but you first need to know about them. When totaled up over a year, this can dramatically reduce the taxes you owe due to freelancing.
Developing deduction categories that you can evaluate and tally at the close of every calendar year should be simple if you maintain solid records. Some of the most popular tax breaks for freelance writer business expenses are:
- The amount of data transferred for commercial purposes determines a percentage of their monthly internet cost.
- A percentage of their rent or mortgage that is proportional to the size of their home office.
- Books, tuition for classes, costs for private tutoring, and conference registrations are all part of this.
- Costs associated with business-critical software like invoicing and accounting packages.
If unsure whether something is deductible, consult an experienced freelancer tax accountant.
6. Open a Business-Specific Bank Account and Credit Card
From the start, treat your freelance writing services as a business. Open a business checking and credit card accounts. Do not use your finances to buy company supplies; set up a separate account specifically for that purpose. Keeping your financial records separate could prevent mixing business and personal cash.
Instead, transfer funds from the company’s bank account to your account to compensate yourself. For those asking, “Do I have to pay taxes on my savings account?” You only pay yourself money after you have set away some of your earnings for taxes.
Ensure the legal business name is included on any company bank or credit card accounts.
7. Establish the Right Business Structure
Your company will be organized as a sole proprietorship by default until you take the proactive step of filing the correct paperwork declaring otherwise. Although there are no financial or legal advantages to operating as a sole owner. Doing so is an easy-to-understand approach to beginning a career as a freelancer.
George Birrell, a certified public accountant at Tax hub, says that running a business as a single proprietor can be risky in the long run.
According to Birrell, the failure of new freelance writers to properly structure their businesses is the most typical mistake they make in their early days as independent contractors. “The LLC is consistently the best entity structure for freelancers.
Hence, the state to incorporate the LLC and whether to convert to an S-corp are the main areas of uncertainty for independent contractors. The answer to this complex question depends much on the specifics of each case.
Freelancer writers can use the S-Corp calculator on Tax Hub to see which business arrangement is better for them.
Do not think the corporate tax election is just for corporations making millions of dollars or people with six figures in annual income. Therefore, freelancers making more than $40,000 annually should consult a professional who can model their situation to determine if this arrangement is appropriate.
8. Hire a Reliable CPA
For a self-employed person, a reliable CPA is priceless. They will handle your tax filings, act as your advocate, and provide supporting documentation during an IRS audit. As your business expands, your tax situation may become more complicated.
Having an expert at your side might help smooth over any possible hiccups. Apart from tax planning for freelance writers, they can assist with other aspects of budgeting, such as the appropriate retirement savings rate.
When filing your taxes as a sole proprietor, it is vital to have the assistance of a certified public accountant (CPA) knowledgeable in this area. As your company’s revenue increases, it can also serve as an essential resource for making important decisions within your company.
9. Get To Know The 1099 Requirements
Freelancers need to be familiar with 1099s to properly file their tax returns. This is the word for the annual tax form some clients will send you.
When you begin working with a new customer as a freelancer, the client may request a W-9 form to keep in their files. Writers who make over $600 in a calendar year from a single customer will have to send you a 1099-NEC form in January of the following year, including all the money you earned from them.
Maintain a current list of clients from whom you anticipate receiving a 1099 and compare the information you get from them with the records you manage for your freelance business.
The 1099 rule does include a few notable exceptions. Clients located outside the United States are exempt from the obligation to provide a 1099-NEC to their independent contractors. In addition, some third-party payment processors, such as PayPal, may only issue you a single 1099-K for all of your annual earnings.
Because of this exception, it is no longer necessary for your customers who make payments via that processor to submit you a different 1099-NEC. Notifying your customers of this will prevent the IRS from assuming you intentionally misrepresented your freelance writer income tax.
You may minimize your financial burden and get the most out of your deductibles with the help of these tax planning tactics. They also protect you from discovering what happens if you don’t file taxes for three years.
So, ensure you are up to date on the tax regulations for independent contractors in 2023 and consult a tax specialist to ensure you get every deduction and credit to which you are entitled. Hopefully, this guide provided the perfect starting point for better taxes for freelance writers.