Tax Tips For Freelancers
It sounds great to work from home, but that also means you'll have more taxes to do! Freelancers don't have their tax taken out of their pay automatically like salaried employees do, which just makes doing taxes a little more complicated. To make sure you're on the right track, Richard Gartland, the tax expert with H&R Block, shares some tax tips every freelancer should know.
How Do I Report My Income?
Assuming you’re the only owner of your business and you didn’t incorporate as a C or S corporation, report your income and expenses on Schedule C as part of your individual tax return.
A few things to keep in mind:
- Your expenses should directly offset your income.
- You can show a loss, but generally must show a profit for three out of five years.
- If you make $400 or more in net profit, you’ll be paying self-employment tax.
How Often Do I Pay Taxes?
Assuming your business is a one-person venture and you didn’t Because you’re earning income without tax withholdings, you should make quarterly estimated tax payments. These payments are required by the IRS, and if they aren’t made, you will risk paying an estimated tax penalty, even if you pay your entire tax liability by April 15. You can make these payments electronically with Form 1040-ES.
How Do I Know How Much the Self-Employment Tax Is?
- Self-employment tax equals 15.3 percent on the first $113,700 of net income and then 2.9 percent on the net income that is in excess of $113,700.
- The Social Security tax component of the self-employment tax is 12.4 percent.
- Note: one half of your self-employment tax is deductible as an adjustment to income.
- If your profits are more than $200,000 ($250,000 on joint returns), you are subject to the 0.9 percent additional Medicare tax.
Because you’re earning income that doesn’t have any withholding, you should make quarterly estimated tax payments — they are required and if they aren’t made, you will be subject to a penalty. You can make these payments with Form 1040-ES. You can make your payments electronically.
How Do I Claim a Home Office Deduction?
If you are self-employed and qualify for the home office deduction, you are able to deduct a percentage of your home expenses as a business deduction, including rent, insurance, utilities, maintenance costs and depreciation. This deduction is based on the square footage of the office in comparison to the size of your entire home. However, be warned that the home office deduction rules are very strict, and your claim could be highly scrutinized by the IRS.
Beginning this year, if you meet the regular and exclusive tests to claim a home office deduction, you may be eligible for a "safe harbor" deduction — a simplified way to figure your deduction. The deduction is $5 per square foot to a maximum of 300 square feet; thus the maximum deduction is $1,500. The safe harbor method will allow you to eliminate complicated record keeping and forms for the deduction. To qualify for a deduction, the office must be:
- In a separate room or area of your house. It can also be part of a room, but the area would still have to be used exclusively and regularly for business, so your dining room table where you also eat would not count. However, a desk in your bedroom used solely for business is totally acceptable.
- Your principal place of business, so you can't have another office or store elsewhere. However, see the "storage" exception below.
Do I Qualify For the Home Office Deduction If I'm Self-Employed With an Office Outside the Home?
Even if you have an office outside the home, you may qualify for deductions if you use part of your home for storing inventory or product samples.
In order to qualify, you must meet the following requirements:
- You sell the stored products at wholesale or retail prices as your business.
- You use the storage space on a regular basis.
- The storage space is separately identifiable from the other parts of your house.