No one likes losing a significant portion of their paycheck to taxes, but in a sense, freelancers actually have it harder. They might have access to 100% of the income they earn, but they need to make quarterly tax payments and plan ahead to ensure they will not face a dire financial situation come tax time. Here are just a few tax tips any CPA will tell clients who work as independent contractors.
How to Handle Taxes as a Freelancer
1. Track Every Job
Some independent contractors maintain a few regular clients for the entire year, but many others complete multiple jobs for multiple businesses within a matter of months. If you fall into the latter group, it’s essential to make a note of every single project you complete over the course of the year. At the start of next year, you will have to request 1099-Misc forms from each individual, business, and organization that paid you more than $600 during the prior fiscal year.
2. Put Aside a Little Extra
In addition to the standard federal income tax, freelancers must also pay self-employment tax, which covers their share of Social Security and Medicare taxes. For this reason, it is wise to put aside an additional 12-15% of your income for taxes. In 2014, the self-employment tax rate was 15.3%, which was actually 12.4% for Social Security and 2.9% for Medicare.
3. Make Quarterly Payments
As an independent contractor, it is your responsibility to make quarterly tax payments. These estimated taxes are due on April 15, June 15, September 15, and January 15. If this is your first year working as a freelancer, estimating quarterly payments can be challenging since you may not necessarily know how much you’ll make. For optimum protection, simply put 30-40% of everything you earn in a separate savings account, and use the funds from that account to make quarterly tax payments.
If you’re an independent contractor and need tax help, turn to SDK CPAs. They have served clients throughout Minneapolis for nearly 30 years. In addition to tax preparation, their areas of expertise include retirement planning, bookkeeping, and business audits. You can explore all the comprehensive services they provide by visiting their website. To discuss your needs with a seasoned CPA, call (612) 332-5500.