4 essential tax season tips for freelancers
This article is reproduced with the permission of our partner, Trupo.
Last week, Trupo hosted a Trim-Your-Taxes tutorial with freelance CPA Jonathan Medows, where he shared the most important steps to filing on time and reducing what you owe.
If you missed it, don't worry! Here are the four main takeaways (and remember: the deadline to file is April 15!)
1. Report ALL revenue on Schedule C of your return—even if you didn’t receive a 1099 from your clients for what they paid you.
When you file your freelance tax return, you'll need to complete an additional form to your 1040, called Schedule C. Schedule C is titled “Profit or Loss From Business (Sole Proprietorship)” and used to report how much money you made or lost in your business.
Here, you should put down all your past year's income (even if it wasn't reported in a 1099) as well as expenses. And speaking of expenses...
2. Claim all allowable business expense deductions.
If you work at home, you have the potential to save a good chunk of money by writing off expenses, like:
-calculating the size of the space you use exclusively for business (as in, a designated office and not your couch) and claiming $5 for each square foot, to a maximum of $300
-if you live in a larger home, tracking your utilities, mortgage payments, rent, home repairs, and home depreciation (this is where a spreadsheet can really help!)
-writing down travel and meal expenses (such as taking a bus to a work site or paying for lunch with a client)
Note: These expenses can get you partial deductions on the total amount you owe–you're not getting all the money back.
3. Keep all receipts and records in case you are audited.
Because the IRS has to make sure people aren't actually writing off their couches and non-work-related Netflix subscriptions as business expenses, they can audit you. That's why it's important to have "legible, readable" documents.
You can use apps like Expensify to digitally store all your paper receipts and file them straight to your accounting software. For documents such as tax returns and credit card statements, you can save the PDFs to the cloud using a secure document management platform such as SmartVault, Dropbox
or Box.
4. If possible, top up your retirement accounts to reduce taxable income and save for the future.
Good news: The IRS increased contribution limits for 2020, which means you can save even more on your return.
A traditional IRA (Individual Retirement Account) is a low-cost way to start your
freelance retirement savings and allows you to save more than $6,000 a year tax-
deferred if you are under 50 (or $7,000 if you are over 50.) Setting up an IRA is as easy as going online to an investment brokerage and setting up an account, or visiting your local bank and talking to an investment advisor. These accounts can generally be started with small amounts of money (sometimes as little as $100) and very low fees.
Be sure to check the specific details of the terms of the IRA you are considering so you know of any related expenses up front.
And if you still feel overwhelmed, hire a CPA (certified personal accountant) who specializes in freelancer taxes!