December is a busy time of year for everyone, and might be especially busy for you if you are running a side hustle, starting a new gig, or managing several side businesses simultaneously. The freelance economy is booming, and while examples like Uber might get most of the attention, there were 55 million Americans who worked as freelancers in 2016 that generated nearly $1 trillion in collective earnings.
If you run a side hustle, have started a new website, are running seasonal gigs throughout the year, or are a freelancer on one of the many freelance employment sites, you are already juggling a lot of information. One thing that might get overlooked, especially if your business is kicking into high gear right now, are the taxes you might owe on your freelance earnings.
Something I always emphasize is that when someone pays you as a freelancer, or even on a 1099-MISC, is that you are ultimately responsible for the taxes that you will owe. The IRS has great information explaining the differences between 1099 and W-2 income, but one of the best ways to not get into trouble is to be prepared.
Let's take a look at some of the steps you can take right now to better handle your freelance income, and taxes, for this year:
1. Not all income is the same.
A critical misstep I see all too often is that freelancers are not always sure of how much income comes from which source. For example, if you are paid by an employer on a W-2 for a portion of your income, are paid via a 1099 for some other work, and are paid purely on a freelance basis for other work this will determine how much taxes you will owe.
First things first, however, get this information together and work your with CPA or tax professional to figure out what your next steps are.
2. Don't forget to take your deductions.
According to Xero, an accounting services and software company, 73 percent of freelancers don't deduct any expenses at all -- this means you are paying more taxes than you should. There is, and rightly so, some trepidation about taking inappropriate deductions and being audited by the IRS, but that should not stop you from deducting appropriate items.
If there are expenses that were necessary for running your business, and that you have documentation for, make sure to use them to offset your freelance income. These items often include:
- Mileage incurred for business purposes
- License and registration fees
- Health insurance premiums paid by both the freelancer and their families
3. Keep an eye open on tax changes.
You are probably sick of hearing about tax reform, and the changes that might be coming for you and your business, but for freelancers and independent contractors the change could be significant. Currently, freelancers and other entrepreneurs pay, in some instances, a rate of 10 or 15 percent on their income if they fall under certain income thresholds. Depending on how your business is structured, and how much income your gig generates, you might up paying some of your income at 25 percent.
Nothing is law yet, but this is something you should definitely keep an eye on for planning purposes.
4. Pay your estimated taxes.
Estimated taxes may seem like a concept only applicable to large corporations, but the threshold is lower than you might think. If you have income, derived entirely from self-employment activities in excess $400, you should work with your CPA or tax professional to start preparing (and paying) estimated taxes.
If you don't make these estimated payments, you may be subject to an IRS penalty come tax time.
5. If you can't pay, let the IRS know ASAP.
We have been talking about taxes, but simply preparing and filing taxes is just the first step of the process. The ability to actually make tax payments is, clearly, something the IRS is very interested in -- if you can't make your payments make sure to let the IRS know as soon as possible.
One common outcome of these conversations is that you sign up for an IRS Payment Plan, or have an extension granted to give you the flexibility you need.
Tax time is not usually a fun time of the year, and talking about taxes is a topic that too many people put off, but some preparation right now can put you in a good position this year. Don't let you freelance hustles and gigs trip you up come tax time -- take a few minutes and start your planning today.