Welcome to the most stressful time of the year for the self-employed US resident: tax prep season! Freedom is great… but freelance taxes are enough to bring us all to wailing and gnashing of teeth.
Before you begin to rage-cry and close this browser tab in despair, take a deep breath. Noko time tracking has your back! We've put together a health-preserving basket of tips tips to help keep you focused, organized, and ready to tackle tax season.
Just remember… we're not accountants, and we're most importantly not your accountants. We've got many years of freelancing experience and we're providing this information in a spirit of helpfulness (we've been there ourselves!). Please check with a CPA for your specific situation.
Here's the basics:
- work for yourself,
- are not a regular employee of a company, and
- made at least $400 in self-employed income
…then you're required to pay taxes in a slightly different way. Hence "freelance taxes."
Self-employed individuals are required to pay Social Security, Medicare, and federal income tax with either quarterly estimated payments… or when annual tax returns are filed. (There might be a penalty if you don't do quarterly!)
Basically, if you did freelance work or earned any income as a self-employed business owner, you've gotta file.
So what next?
1. Know your freelance business income and expenses
Ideally, you will keep track of your income and organizing your expenses at least once per quarter, especially if you're filing quarterly. The key to understanding what you owe is to have a handle on what you've earned—without that info, it's just guesstimates.
And "guesstimate" is not the word you want to apply to your tax return.
There are several excellent tax calculators online that can help you get a general idea of what your taxes might look like, including this one from Tax Act.
Did you know that Noko does expense tracking on top of invoicing and hourly rates? You can track expenses for your client projects… and your own! Sign up for your free trial today.
2. Keep track of your paperwork
You're the boss — and that means that you're responsible for accurately maintaining all business records. If you're cringing, it's ok. Lots of us aren't great at paperwork.
But now is the time to gather what you have and start sorting it, well before the filing deadline in mid-April. Most tax preparers don't even need the physical receipts to do their work, so as long as you keep your physical copies safe in a nice folder for each year, a digital list — a spreadsheet, or a Noko export — is all they need.
You can use any phone to photograph receipts and invoices as soon as you get them — or even a dedicated receipt and paperwork scanner like NeatReceipts.
Be sure to back up your digital copies to Dropbox, iCloud or Google Drive!
The best way to conquer the cringe is to find a system that works with your existing habits (like having your phone always in-hand).
3. Understand your tax deductions
The best part of freelance taxes? Deductions! To offset the greater tax burden, you're allowed to take your genuine business expenses straight out of your real gross income, reducing your taxable income and lowering the taxes you have to pay.
Remember: Investing in your business is a tax break you can take any time!
Health insurance premiums for yourself, your spouse, and your dependents can be deducted as an adjustment to your income—just be sure to maintain receipts in case you are selected for an audit.
If you are lucky enough to have a qualified home office, be sure to deduct a proportionate of your utilities, homeowner/renter insurance, and rent. (The rule of thumb is "a well-defined area that is used only for business," such as a single room exclusively used for work, or a section of another room bounded by pieces of furniture!)
And of course you can deduct office supplies, like paper and ink, and hardware such as printers, laptops, or software purchased for your business. (Some more expensive items may have to be depreciated over several years — meaning you can't take a full tax deduction the year you buy it. Ask your preparer for details.)
If you're considering deducting vehicle use, be sure to keep accurate records of your gas, oil changes, and vehicle maintenance — or consider taking a standard mileage deduction. Either way, make note of your business errands, meetings, and trips taken in your car.
Smartphone apps like TripLog and MileIQ will do this tracking for you.
Got ghosted by a client? If you have invoices that remain unpaid at the time of filing, you may be able to write them off as debts—ask your tax preparer!— just keep in mind that you'll have to add their total to your earnings income.
And, of course, business tools like time tracking software are deductible. Hint hint!
4. Hire a professional
We keep saying "consult your tax preparer" for good reason: It's a sad fact that the IRS chooses to audit more self-employed individuals than employees or even owners fo larger businesses.
Software is great — we love software! — but a qualified accountant or tax professional can help you with your specific situation, come up with deductions you might not have thought of, and carefully calculate the ones you are definitely qualified for.
They're also qualified to communicate effectively with the IRS.
Aaaaand, perhaps most importantly of all — assuming you give them correct info — they serve as a professional shield in case there's an error in your return. Their license and signature on your tax filings is a serious protection for you.
Bonus: hiring a pro is itself a business expense!
5. Set aside money every quarter for your freelance taxes
Alas, freelancers rarely if ever experience the joy of the surprise tax refund.
To avoid nasty surprises in the other direction, a good rule of thumb is to save 25-30% of your gross income for taxes. It's a good idea to put this money in a separate account so you aren't tempted to spend it.
And, if you use one of the newer online banks, you may earn up to 2% interest while virtuously letting your cash sit. Shop around for the best deals and set up a habit of transferring the money right away when you get a payment.
6. Know what to do if things go wrong
All that said, shit happens. And you still gotta eat.
When that happens, the IRS actually… kinda… has your back…?
There's a little-known service the IRS offers called a payment plan.
Basically, the IRS lets you finance your tax debt, but at a rate much, much lower than any personal loan or credit card. As of writing (February 2020), the IRS's interest rate is just 3% annually. That's inflation.
It's the cheapest money around.
If you owe less than $50,000, you will typically be approved instantly over the phone using an automated system… no need to even talk to a human.
You can learn more here.
7. Plan to bill more and earn more in the next year
You can — and should! — minimize your taxes. The whole economy benefits when you use money to grow your business by buying, hiring, and investing.
But you can only cut so far.
The best way to keep more money in your pocket next year is to maximize your billing.
Bill your clients for for every hour, every little "just takes 1 minute" change they request. Reading your clients' emails? Billable. Thinking in the shower? Billable. One little tweak? Billable. Sales calls? Not billable, but they should be worked into your actual hourly rate.
That's where Noko comes in.
Noko not only helps you track your time, it'll help you master your time (and identify which clients are actually costing you money!).
Now's a perfect time to try Noko for free for 30 days and get your house in order for the next quarter!