Work From Home

An Explainer for Freelance Writers

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That is my ninth yr of full-time freelance writing, which I’d prefer to say makes me an knowledgeable at freelance taxes.

Nonetheless, the reality is that I be taught one thing new yearly — whether or not it’s how a lot to put aside for estimated taxes, what accounting software program I needs to be utilizing or what proportion of my web invoice counts as a enterprise expense.

I provides you with this tip, as somebody who’s been within the freelance tax-paying recreation for some time: the most effective factor you are able to do as a freelancer is get a CPA, and the second-best factor you are able to do is ask your CPA questions. Belief me on this one.

Asking the appropriate questions can prevent plenty of time and forestall you from getting caught with an sudden tax invoice in April.

So let’s dive in. First, we’ll take a look at what inquiries to ask your accountant earlier than tax time, then we’ll take a look at what estimated taxes are and how one can pay estimated taxes, then we’ll take a look at different often requested questions, aka FAQs for freelancer taxes.

Ask these inquiries to your accountant earlier than tax time

Listed here are a few of the questions I want I’d requested my CPA after I first began doing freelance taxes, in addition to a number of gadgets I wouldn’t have identified about except my CPA had advised me.

Keep in mind that I’m not an accountant, so if you need actual tax recommendation, you should ask your personal CPA these similar questions:

1. Is there a most well-liked accounting software program you’d like me to make use of?

After I began freelancing, I did all of my accounting on a handmade spreadsheet, assisted by a number of Gmail folders labeled “tax deductions,” a field of paper receipts and my financial institution statements. Final yr, I received a brand new CPA who recommended I swap to a typical accounting software program. This is able to make her life simpler, as she wouldn’t must decipher my spreadsheets — which make excellent sense to me — and she or he thought it’d make my life simpler as nicely.

Seems she was proper.

In the event you aren’t already utilizing a contract accounting software program, it’s value it to strive one. The Write Life recommends FreshBooks and Harvest, however you must also ask your CPA if they’ve a most well-liked accounting software program.

2. What can — and might’t — I do in my dwelling workplace?

I used to freelance in a studio house, and my CPA advised me that, since I used the identical small desk for writing, consuming, and watching TV reveals on my laptop, it didn’t rely as a house workplace.

To assert the house workplace deduction, he defined, I needed to have an area reserved just for work.

After I moved into a bigger house, I had sufficient area to order a nook for a house workplace.

If you wish to declare the house workplace deduction, speak to your CPA about what you’ll be able to and might’t do in that area to verify it qualifies.

3. Is my laptop computer or telephone a depreciating asset?

Your CPA could ask you about depreciating belongings, that are bodily gadgets that lose worth over time.

You’re allowed to deduct a portion of this asset’s value over the lifetime of the asset, which is the form of assertion that’s difficult sufficient that it’s best to actually go away it to your CPA.

However you must also ask your CPA in case your laptop computer is a depreciating asset. In the event you use your smartphone for enterprise, or you probably have cameras or microphones for vlogging or podcasting, ask about these too.

Any know-how that you simply use for work and often substitute may rely as a depreciating asset, and get you yet one more tax deduction.  

4. What proportion of my telephone and web payments can I deduct?

In the event you use your private home web for enterprise — and what freelancer doesn’t? — you might be entitled to deduct a proportion of your web invoice in your taxes. Identical goes in your smartphone invoice.

Relying on what your CPA thinks of your private home workplace, you might also have the ability to deduct a few of your utilities. Ask. Don’t assume your CPA will convey it up.

5. Do I want a enterprise license?

Generally paying federal and state taxes aren’t sufficient. Relying on your enterprise, you might want a enterprise license, which comes with enterprise taxes. You may additionally must pay metropolis taxes as nicely.

So ask your CPA whether or not you want a enterprise license. Don’t simply go to your state’s licensing web page, search the licenses, and assume that you simply’re okay since you don’t see a license choice for “freelance author.”

I pay enterprise taxes to the State of Washington below the class “Service and Different Actions; Playing Contests of Likelihood (lower than $50,000 a yr).” That’s why you should ask an expert about these sorts of issues.

6. What deductions ought to I observe?

Freelancers are sometimes entitled to extra deductions than we understand, and we deserve to assert all of them. In the event you go to a writers’ conference, for instance, you’ll in all probability have the ability to deduct the price of the convention, the price of the journey, and a proportion of your meals.

However you received’t know what you’ll be able to deduct till you ask. Analysis supplies? Postage? That point you requested one other freelancer for an informational interview and paid for the espresso? What concerning the Lyft you took to interview a supply? Or the mileage, when you drove your personal automotive?

There are many potential freelance deductions on the market, so it’s necessary to observe your bills, even the small ones, and ask your CPA which of those bills it’s best to deduct.

Don’t neglect to ask which deductions you may overlook, or which deductions it’s best to observe for subsequent yr’s taxes, like the price of that accounting software program you simply purchased!

Estimated Quarterly Taxes – The What, Why, and How

Everyone knows to file a person tax return by April yearly. 

However do you know that as a enterprise proprietor, you’re anticipated to file estimated funds each quarter, as nicely? 

It’s true. When you anticipate to owe the federal authorities not less than $1,000 in taxes annually, you might be anticipated to file quarterly taxes all year long. 

Why? As a result of the federal government doesn’t wish to wait till April to get a minimize of what you earn. It desires you to pay as you go, similar to when you have been an worker at an organization that withheld taxes out of your paycheck and paid them persistently in your behalf.

Paying quarterly estimated taxes isn’t elective; when you fail to pay up all year long, the federal government may penalize you with curiosity whenever you file your tax return for not paying sufficient tax.

Submitting quarterly is outdated hat for me now, however I bear in mind how I felt about this after I first launched my very own enterprise. I puzzled how on earth new enterprise house owners have been speculated to find out about this! No fairy Godmother reveals up at your door and says, I see you’re self-employed! Let me stroll you thru your tax necessities.

I used to be lucky to have my accountant dad, who co-authored The Money Guide for Freelance Writers, to coach me. Right here’s what he taught me.

Why it’s important to pay estimated quarterly taxes

Understanding you’re speculated to do one thing usually isn’t sufficient for sensible enterprise house owners. We wish to know why we’re speculated to do it. Plus, understanding the logic behind this will make it simpler to comply with via.

So right here’s why quarterly tax funds exist. One of many perks of working for another person’s firm is that they pay taxes on behalf of the worker all year long. Every time that worker will get a paycheck, the corporate withholds Social Safety, Medicare and revenue taxes, which signifies that cash’s gone earlier than the worker even opens the paycheck.

Consequently, workers generally neglect they’re paying taxes all year long. Even when you realize these taxes come out of your paycheck, it’s not one thing you suppose a lot about till you file your annual tax return and work out whether or not it’s important to pay extra or obtain a welcome refund.

Right here’s the distinction whenever you’re self-employed: no firm pays these taxes in your behalf. It’s as much as you to make the funds. And whenever you accomplish that each few months, it’d really feel like a kick within the intestine.

The rationale it hurts a lot is as a result of taxes eat up a good portion of your revenue. Most freelancers who encounter this for the primary time suppose they earned first rate take-home pay throughout the quarter, solely to comprehend they must pay an enormous chunk of these earnings to their federal and state governments.

As a substitute of getting annoyed with taxes, let’s concentrate on serving to you perceive when and how one can pay them, so you will get again to the enjoyable components of working a enterprise.

When are estimated taxes due?

This tends to be one of many largest questions round quarterly taxes: when are estimated taxes due?

You’re required to file them on the identical schedule annually. (Except, in fact, the federal government delays these deadlines due to a pandemic or another widespread catastrophe, prefer it did in 2020.)

Right here’s the schedule for submitting estimated funds:

  • By April 15: to cowl earnings from Jan. 1 – March 31 (Q1)
  • By June 15: to cowl earnings from April 1 – Could 31 (Q2)
  • By Sep. 15: to cowl earnings from June 1 – Aug. 31 (Q3)
  • By Jan. 15: to cowl earnings from Sep. 1 – Dec. 31 (This autumn)

The schedule could be complicated as a result of funds aren’t due precisely three months aside. They’re known as “quarterly funds,” however, as you’ll be able to see, they don’t all cowl a three-month interval.

Nonetheless, due to how these “quarters” are unfold out, it’s OK to consider every cost as protecting three months’ value of tax, if that’s simpler to wrap your head round.

In the midst of this schedule, you’ll even have one other huge deadline: tax day on April 15.

In the event you’ve filed a tax return beforehand that features self-employed revenue and used a tax software program like TurboTax, that software program will seemingly give you estimated tax cost varieties. It would even inform you how a lot to pay quarterly, basing these estimates on what you earned the earlier yr.

What ought to I do about estimated taxes if my revenue will increase?

That is the one query I want I had requested sooner.

The primary CPA I labored with checked out my yearly revenue and gave me a set of estimated tax vouchers to make use of on the next yr’s quarterly estimated taxes. I received 4 accomplished estimated tax varieties, every with an sum of money that I used to be speculated to pay. All I needed to do was write the checks and drop the estimated tax vouchers within the mail on their respective due dates (or pay on-line).

Nonetheless, I elevated my freelance revenue considerably from the earlier yr to the following. I didn’t understand that meant I used to be paying considerably much less in estimated taxes than I ought to have been paying.

My CPA and I found that, due to my elevated revenue, I owed the IRS an extra $5,443.

In case your CPA provides you estimated tax vouchers, ask what it’s best to do in case your revenue will increase.

In my case, I began placing apart a proportion of my revenue to go in the direction of estimated taxes, as a substitute of paying a hard and fast quantity on a voucher.

How one can pay estimated taxes

Let’s assume that is your first yr as a freelancer and you should hunt down quarterly cost varieties for the primary time. You possibly can pay on-line; this IRS website lays out your choices.

It’s also possible to pay by way of test after downloading this manner on-line: Form 1040-ES

Whereas I do virtually all my filings on-line nowadays, I nonetheless pay estimated funds by way of test, as a result of I’ve a system that works for me. I preserve paper varieties for estimated funds in a folder in my workplace, so as soon as it’s time to pay, I don’t have to go looking on-line to seek out the appropriate varieties and addresses for the place to ship them. All my paperwork is ready proper in that folder, and I can simply write a test and drop it within the mailbox. 

Fear you’ll neglect to pay estimated taxes? I add reminders for all of those dates on my Google Calendar after I file my tax return annually, so I do know I’ll see the reminder all year long.

How a lot estimated tax do you have to pay?

How a lot tax you pay is determined by your tax bracket and a number of different elements, together with how a lot you’ll be able to declare in deductions. This may make it troublesome to determine how a lot estimated tax it’s best to pay.

However right here’s the excellent news: Estimated tax funds are merely estimates. They’re not anticipated to be excellent. They only must be shut sufficient. 

Your purpose — and what the IRS requires — is to pay both 100% of the estimated tax that might be due in response to your earlier yr’s tax return, or 90% of what you truly owe this yr.

To make this easy for you, I want I may say, “put apart 30% of your enterprise revenue every quarter to pay estimated taxes.”

However you may pay extra, otherwise you may pay much less. Listed here are 3 ways to determine how huge a test to write down every quarter. 

1. Ask your accountant

In the event you work with an accountant, you’ll be able to ask them that can assist you work out how a lot to pay in estimated tax. They’ll stroll you thru it so the end result is predicated in your particular scenario.

For many of us, that is one of the best ways to get an correct determine. 

2. Use final yr’s tax return as a information

Take a look at your tax return from final yr. In the event you anticipate your revenue to be comparable this yr, work out your effective tax rate.

Since your efficient tax price isn’t listed in your tax return, right here’s a easy strategy to calculate it: divide the whole tax you paid final yr by your adjusted gross revenue.

Then use your efficient tax price to calculate your estimated taxes: multiply your efficient tax price by this quarter’s revenue. 

This isn’t an ideal methodology, nevertheless it ought to get you shut sufficient.

3. Depend on IRS varieties

An alternative choice is to make use of the worksheet on IRS Form 1040-ES to determine how a lot you owe. 

Spoiler alert: this isn’t simple! Even IRS worksheets that are supposed to make our lives simpler are typically extremely difficult.

Paying estimated quarterly state and native taxes

Sure, it’s important to pay state revenue tax along with federal revenue tax. Except you reside in a state with no revenue tax.

State revenue tax varies significantly relying on the place you reside, beginning at zero in 9 states. In West Virginia, the place I stay, it’s about 6.5%. In California it’s greater than 13%.

Whether or not your state collects revenue tax and the way aggressively has an enormous impact on how a lot you should put apart for taxes. The identical goes for native taxes. In the event you stay in California, which has excessive state tax, or New York Metropolis, which has excessive native tax, you may end up having to place apart 35% to 40% of your revenue for tax. In the event you stay in Texas, which doesn’t acquire revenue tax, you may fall on the decrease finish of the spectrum, placing apart 25% or much less of your revenue.

In case your ears perked up after I mentioned “no revenue tax,” right here’s a listing of 9 states the place that dream is actuality: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. New Hampshire and Tennessee additionally don’t tax wages, however they do tax funding revenue and dividends. 

Some individuals who have flexibility over location transfer to states with no revenue tax to maintain extra money of their pocket. It provides up over time!

To determine how one can file estimated state tax the place you reside, merely google “[your state] estimated tax funds.” That ought to return varieties and directions, together with an choice to pay on-line via your state’s division of tax or income web site; keep away from third-party websites that cost you for submitting. 

Directions fluctuate by state, however pay your state estimated taxes on the identical schedule as your federal funds. Native tax deadlines are often totally different than federal and state deadlines.

Methods for protecting estimated tax

Simply since you solely must pay these taxes 4 instances annually doesn’t imply it’s best to wait till then to consider them. Actually, when you make that mistake, you may not find the money for within the financial institution to cowl your estimated funds.

That’s why many freelancers squirrel away cash for taxes every month. Some freelancers go away that cash sitting of their checking account till it’s time to pay up, whereas others open a separate checking account to gather cash that can ultimately go towards taxes, to maintain them from spending it.

Freelance author Nicole Dieker, for instance, wrote about how she stashes away 20% of her income every month. Why solely 20%? As a result of on the time of writing that submit, she lived in Washington State, which doesn’t have state revenue tax. Because of this it’s so necessary to know your state’s legal guidelines and work them into your monetary technique.

Monetary author Carrie Smith at one level made a daily transfer of 15% to 20% of her earnings right into a separate financial savings account. She even nicknamed the account “Earnings Taxes.”

“The laborious half is vowing to not contact it,” Carrie wrote on her weblog. “However when you can keep it up, the following time it’s important to pay your tax invoice, you’ll be glad you set this technique into observe.”

Placing cash apart for estimated taxes, moderately than hoping you’ll have sufficient when it’s time to pay them, is one sensible strategy to lower your stress whereas working for your self.

Conclusion

Getting a very good CPA is step one in the direction of working your freelance enterprise successfully.

Asking the appropriate questions — particularly round tax time — is the second.

Do each, and also you’ll in all probability discover that your freelance taxes get simpler yearly.

What questions do you want you’d requested whenever you began doing freelance taxes?

That is an excerpt from The Money Guide for Freelance Writers: How to Manage (And Feel Good About) Your Finances.

This submit incorporates affiliate hyperlinks. Meaning if you buy via our hyperlinks, you’re supporting The Write Life — and we thanks for that!

That is an up to date model of a narrative that was beforehand printed. We replace our posts as usually as doable to make sure they’re helpful for our readers.



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