Millions of Americans earn income through freelancing and gig work. If you are one of them, you probably enjoy the extra income earned through contract work.
But before you plan on spending every dollar you earn, remember you have to pay taxes on this income.
Freelancing and taxes go hand in hand. When you are hired at a company as an employee, income taxes are taken directly from your paycheck and paid on your behalf. This is not the case with freelancing income. You are responsible for paying self-employment taxes on your own.
When you earn extra income, you are required to pay the IRS a portion of the money earned. This guide will help you determine how much to pay to avoid fines, fees, interest, and penalties.
Do I Need to Pay Taxes as a Freelancer?
Individuals are required to pay taxes on income that is not taxed before it is paid.
If you earn $400 or more in a year from miscellaneous income sources, you are required to pay self-employment taxes.
This income could be earned through:
- Gig work
- Freelancing
- Independent contracting
It could also be earned through revenue streams such as:
- Affiliate income
- Online sales
- Licensing
- Ad revenue
- Course sales
- App income (such as Uber, Airbnb, etc.)
- Property rentals
If you receive income from contract work or a side gig, follow these steps to make a tax plan.
How to Do Taxes as a Freelancer
1. Treat your side hustle as a business.
Many new freelancers and gig workers make a mistake when they begin bringing in extra income. They collect their payments, cash their checks, and fail to keep accurate records. Haphazardly bringing in income can lead to major problems down the road. The better approach is to treat your side hustle like a business from day one and use a professional bookkeeping system.
- Set up an accounting system. We recommend Quickbooks, but you could also use a simple Excel sheet.
- Track all income. Each time you receive income, track the amount, who paid, and when you deposited the funds.
- Track all expenses. Each time you spend money that supports your side work, document the payee, the amount paid, and the type of expense.
- Keep personal and gig work finances separate. Use separate bank accounts and credit cards for personal income and expenses and side gig income and expenses.
- Keep your receipts. Start a digital and physical folder to collect all documents related to side gig expenses.
Utilizing bookkeeping best practices from day one will ensure you have accurate records to make it easy to navigate freelancing and taxes. You will have records that show you exactly how much you need to pay.
2. Assume roughly 30% of your income will go to taxes.
While you won’t know exactly how much you owe in taxes until you consider exact income, expenses, tax brackets, and tax rules and regulations, you can estimate how much you will need to set aside.
A good rule of thumb is to assume at least 30% of your income will be paid to taxes. This percentage will be different depending on local, state, and federal tax laws, but it can give you a reasonable estimate.
3. Claim all income (no matter how small).
When collecting income from multiple sources, it can be easy to miss a check or overlook an income stream. This might not seem like a major problem, but it can be. Failing to report income can come back to get you and leave you with a surprise tax bill.
The companies that pay you are required by law to tell the IRS how much money they paid you. If the IRS finds out you have been paid and did not report the income, it can lead to fines, penalties, and interest fees.
4. Get every deduction.
The expenses you incur to support your side gig can be deducted from your income to arrive at your tax liability (the amount of money you pay taxes on).
To lower your tax liability, make sure that you track every deductible expense. Many freelancers overlook small business tax deductions they can use to lower their liability. If you are engaging in gig work, get every deduction you can, which may include:
- Home office expenses
- Cell phone costs
- Internet costs
- Vehicle expenses
- Retirement contributions
- Education costs
Read More: Do I Need a Bookkeeper? 10 Signs That Point to Yes
5. Contribute to retirement.
Many full-time jobs offer an option to contribute to retirement accounts such as a 401k. Contract work does not offer this benefit. If you are making a majority of your money through self-employment, plan for the future by taking a portion of your freelance income and contributing to a retirement account such as an IRA.
Some retirement contributions are deductible, so they can lower your tax liability while helping you plan for the future.
6. Pay taxes quarterly.
Freelancers and gig workers are not only required to pay taxes; they are required to pay them throughout the year.
Rather than paying taxes all at once at the end of the year, freelancers should make quarterly payments to the IRS.
Related: Add These Important Tax Deadlines to Your Calendar
7. Find a tax partner.
Managing freelancing and taxes can be tricky. While it’s possible to track your accounting and prepare your taxes yourself, remember step one. Treat your side hustle like a business. When it comes to freelancing and taxes, it can pay to pay a professional.
A professional tax accountant can:
- Calculate the exact amount of taxes you owe.
- Ensure you get all tax credits and deductions.
- Submit accurate quarterly tax payments.
- Avoid mistakes that can lead to an expensive audit.
Can you do your taxes on your own? Sure. But by working with a professional, you can have the peace of mind that you’ve properly paid what you owe. A professional can offer you less stress, more time, and more accurate returns.
Read More: 9 Questions for a Potential CPA: What to Ask When Hiring a Tax Partner
Freelancing and Taxes: How to Get It Right
If you are a side hustler earning income through multiple revenue streams, CFO2U is here to help. Our team specializes in helping small business owners get it right when it comes to their finances.
We’re here to make sure you file accurate returns that provide the best benefit for your wallet and peace of mind. Let’s talk. Schedule your free call with our team today.
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