When I first started freelancing, there were at least a dozen things more urgent to me than taxes. Networking, incorporating, setting up a website, client pipeline… you name it.
It wasn’t until tax time, nine months later, that I realized my mistake. How? TurboTax told me that I owed $13,200 to the IRS. I scraped the money together, but it changed my attitude toward taxes forever.
Three years later, I’m the co-founder and CEO of Keeper Tax, a service that automates taxes and expense tracking for freelancers. Over the years, we’ve helped over 50,000 freelancers get a better handle on taxes, and the experience has left me with this list of the top five things I wish every freelancer (including my younger self!) knew about their taxes.
Taxes are not withheld from your paychecks
If you’ve only ever worked as an employee, you may be (unpleasantly) surprised to discover that you will not be getting a refund at tax time this year. In fact, you will owe the government a lot of money. Way more than you’re probably expecting.
As a simplistic rule-of-thumb, multiply your freelancing income by 30 percent. That’s about how much you should regularly set aside in your bank account for taxes. For example, if you earn $30,000 from freelancing income, expect to owe $10,000 at tax time.
Related: The Benefits of Keeping Tax Records All Year Round
Lots of things you buy are tax write-offs, so keep records
If you’re self-employed, the government thinks of you as a small business owner. Like a business, you have revenue (paystubs, invoices) and loss (expenses). You get taxed on the difference (profit).
A lot of freelancers under-estimate what counts as an eligible business expense. They don’t realize that things you’ve been paying for all along, like your phone bill, rent expenses and transportation expenses, might actually be considered tax write-offs. Learning which tax write-offs you’re eligible for is critical to minimize your tax bill.
You also need to record these write-offs throughout the year. Waiting until the end of the year and attempting to remember what Uber rides you took on the way to a client meeting is tough. Odds are, you won’t remember.
You can probably claim the home office deduction
A lot of solopreneurs assume that in order to claim the home office deduction, you have to have a separate office inside of your home. In reality, the rules are much less strict.
Unless you have an actual office space that you commute to, it’s likely that the work you do from home will qualify you for the home office deduction. As long as you have a space inside your home or apartment that can qualify as a workstation, which you don’t use for extensive personal activities, you can claim a portion of your rental or home expenses as a tax deduction!
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You need to file quarterly taxes
Quarterly tax payments, also known as estimated taxes, are required for most self-employed people. Payments are due four times throughout the year, and the exact dates are listed here.
If you don’t pay them, you’ll owe a penalty at the end of the year; and depending on how much you earn, that penalty can get quite large.
While filing taxes four times a year sounds scary, it doesn’t take long. The simplest way to do so is to assume a 30 percent effective tax rate on your expected self-employment income during the year, and divide that by four.
All of this applies even if you’re only freelancing part-time
Unfortunately, the government doesn’t care if you also have a W2 job or are otherwise not full-time freelancing. Either way, your self-employment income will be taxed at the end of the year, and any expenses you can claim as tax write offs will help you reduce that bill. The only exception is that you might not owe quarterly taxes (you can check here)!
I hope that this list helps others avoid the mistakes that I made in my first year as a freelancer. Pass it on!
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Paul Koullick, Khareem Sudlow
