Complete Step by Step Guide on How to do Taxes for Accountant Freelancers
Nobody gets really excited when tax time comes around. Taxes are paperwork-heavy, highly regulated, and honestly, a little frightening. Even when you know you are doing everything right, there is always the fear that something has been missed.
This uncertainty is only compounded for self-employed individuals who have to account for themselves as both business and employee. The forms used by these people are different, the regulations are specialized, and tax payments need to be submitted multiple times throughout the year.
There is no need to fear your taxes, though. By following this guide, you’ll have all the information you need to file your taxes as a self-employed individual. So jump on in and tackle the tax beast before the season gets away from you!
Reasons freelance taxes differ from W-2 employees
There are 3 main reasons why freelance taxes differ from full-time employees. When you’re providing a business with your services, you’re not their employee, but technically you’re self-employed.
Filing taxes as a freelancer is different from filing as an employee. Here are the reasons:
Self-employed accountants pay taxes out of pocket
Freelancers have to pay self-employment and income taxes out of their own pockets.
The income tax rate depends on your tax bracket whereas the self-employment tax rate was a flat 15.3% in the year 2021, which covers all your Medicare and social security taxes.
Traditional employees also pay these taxes. However, their tax bill is automatically deducted from their paychecks, whereas their medicare and social security show up on their pay stubs itemized out.
Freelancers get greater tax deductions
Freelancers need to know how much of their earnings they’re also spending because those expenses become their tax deductions.
The money spent on the given expenses can all count as deductions:
- Home office updates
- Self-employment taxes
- Business travel
- Health insurance.
Freelancers are required to pay quarterly taxes
As a self-employed accountant, you have to pay quarterly taxes. The IRS requires freelancers and small businesses to make quarterly estimated payments if their estimated tax owes to $1000 annually. Depending on your state, you might have to pay additional state taxes.
Traditional employees are not required to pay these taxes. Instead, their employers withhold the taxes and pay the bills.
How to file your taxes as a freelancer
When you file taxes as a freelancer, you’re viewed as a small business by the IRS. Your taxable income is the total income of your business minus your expenses.
Keeping track of your income and expenses can be confusing at first but we’re here to guide freelancers on filing your taxes.
Here are some of the forms required:
- 1099-MISC: documentation of income provided by the clients
- 1040: individual tax return filed on Tax Day whether you’re a freelancer or not
- Schedule C: This form is part of your individual tax return where you total up your freelance business’ income (profit or loss) for the year
- Schedule SE: this part of your individual tax return determines how much self-employment tax you owe.
- Pay quarterly estimated taxes (if applicable)
Freelancers who owe at least $1000 in federal taxes on Tax Day are required by the IRS to make quarterly estimated payments.
Different states have different thresholds for these payments. For example, in Minnesota, you’re required to pay quarterly taxes if you owe even $500.
Quarterly tax payments are due on the following days, every year:
- Q1 — April 15 (Tax Day for W-2 employees as well)
- Q2 — June 15
- Q3 — September 15
- Q4 — January 15 of the next year
You can hire an accountant when the quarterly tax deadline approaches in order to get help with the estimation of federal and state taxes.
You can use the IRS Form 1040-ES to calculate federal estimated tax payments, which you can pay online as well as in the mail.
The rest of the steps will guide you through annual tax return filing.
- Assemble your 1099-MISC forms
The clients who’re paying you more than $600 per year for your freelancing are required to send you a 1099-MISC tax form that states their payments made to you.
If you receive payments of more than $600 through apps like PayPal, Stripe, or Square, these platforms are also required to create the 1099 forms for you. You can gather all the 1099-MISC forms of the tax year and calculate your total income accordingly.
You can calculate the income and expenses yourself, even if a client doesn’t send you the 1099 form.
- Use Schedule C for calculating net income
Before filing your taxes, you need to determine your net income through schedule C which calculates total income, adds up all the expenses, and then calculates net taxable income.
- Calculate self-employment income and tax
The calculated net income from schedule C can be used to complete the Schedule SE form that provides you with your self-employment and income tax.
- Calculate income tax
You can calculate your individual income tax bracket and bill by filling out the rest of the IRS form 1040, using your total income.
- File local, federal, and state taxes
File your local, federal, and state taxes directly to the IRS, either with the help of an accountant or through a tax software.
If you like accounting, you might be able to handle your finances yourself, but it is smarter to hire a professional CPA or a bookkeeper to help with taxes, particularly during tax season. It is also a smart move to use softwares for tax filing.
2 Great Software For Freelancers
As a freelancer, you need to track your business income and expenses throughout the year. Here are two great options for streamlining your financials that can make tax season easier.
QuickBooks Self-Employed is a widely used tax app for independent contractors and freelancers that can track your income and expenses throughout the year. It includes integrations with apps like TurboTax. QuickBooks generates a year-end income statement and balance sheet for your accountant if you work with a tax professional.
The pricing starts at $4.50 per month.
A wave is accounting software that is a very friendly option for bookkeeping and also expense recording if there’s no room in your budget at the time. It is the best option for freelancers who have a very simplified business structure. A key feature of this software is that it syncs with your bank account and downloads your transactions as they come in.
The software is free for accountants and freelancers, therefore another great option.
Accountants Must Know Your Forms
Any official filing requires a lot of documentation and correspondence. Working with the IRS is no different. As a freelancer, there is a bevy of documents that you’ll encounter, that you will not have seen as a standard employee.
Knowing the documents you’re likely to come across will help prepare you to properly file your taxes. Keep in mind that all of these documents and instructions for their use are available on the IRS website, www.IRS.gov/forms-instructions. We’ll cover more in-depth the specifics of the items in these forms later in the article.
The 1099 and 1099-MISC are documents used by employers to report income for non-employee individuals. This document is used similarly to a W2 as it is provided by the employer to the freelancer who has provided work to them. The difference here is that a freelancer will, presumably, have many 1099s from various sources, whereas a standard employee only has one form.
A 1099 form has specific regulations to meet before it is released. Employers do not send 1099s unless at least $600 in income has been paid to the individual. For small jobs or part-time freelancing, this limits the forms that are provided.
These forms are not only sent to the freelancer but are also filed with the IRS to help them keep track of income paid out. The deadline for 1099 filings by employers is January 31st of the respective year, so you should have yours in hand the first week of February.
A Schedule C form is used by a freelancer to report income or losses from a business they run. Most self-employed people are required to file this document with the IRS. This form is not only used for reporting the financials for the business in a specific year but is also used to report tax-deductible business expenses.
The form Schedule SE is used by self-employed people to report self-employment income. Where Schedule C is all about the business, Schedule SE is all about you. This document encapsulates the earnings you made as an employee of your business and is then used to calculate the self-employment tax that you need to pay.
Many people are familiar with the form 1040 if they are familiar with any tax form. This is the standard form used to file your gross income with the IRS and calculate your annual taxes. Most other documents are supplements to this one.
On 1040 you can claim applicable deductions based on the prior year. This helps to reduce your overall tax burden. Additionally, there are potential tax credits offered that appear on this form. By the end of this document, you should know what your tax liability is and if you owe an additional payment or should expect a refund.
This document is not a tax form, but rather a worksheet for determining your estimated tax liability. For people who do not have money withheld from their paychecks, this form is recommended. Estimating total taxes due will allow for appropriate payments to spread the liability across the year.
The 1040X is used to amend a tax document that has already been submitted to the IRS. These forms can be filed at any point within three years of the original filing. Though you won’t frequently need this form, it is a good one to know exists.
The Self-Employment Tax
There are many taxes to be aware of in any field of work, but for self-employed people, there is an extra one that sometimes gets forgotten. There is a special tax called the “Self-Employment Tax” assessed to cover taxes that are not being withheld from a standard paycheck. This tax is meant to adjust for the missing Social Security and Medicare taxes that would be withheld from your employer.
The tax percentage appears higher for self-employed individuals than what you would see on a paycheck due to the fact the individual is both the employer and the employee. In a standard work situation, the employer is expected to pay half of the tax and withhold the other half from the employee. As mentioned above, there is a special tax form, Schedule SE, to make sure this tax is accounted for and paid.
This specific fee is normally charged to the self-employed person spread over quarterly payments. By requiring payments to be timed this way, the IRS must make payments based on an estimate of what overall earnings will be. This means there may need to be adjustments made with your annual tax filing.
Find All of Your Deductions
All of the expenses that go into running your business can be a boon at tax time, as many of the pricey items needed to stay in business are able to be deducted. Some of the items are overlooked as they are such common costs. Make sure to look over the things you are paying for to maximize your deductions and save on your bottom line tax payment.
Remember that self-employment tax required extra paperwork and double pay in an amount that a standard employee would pay? There is a deduction for that! In fact, 50% of the self-employment tax that you pay can be claimed as a tax deduction.
Many items fall under the category of business expenses when figuring out the taxes for a self-employed person. The IRS states that “business expenses are the cost of carrying on a trade or business”. This allows for deductions on the costs of anything necessary or ordinary in the business activities you engage in.
Deductible expenses include items used to create an inventory; in bookkeeping terms, these are the expenses built into your cost of goods sold figures. The cost of goods sold encapsulates more than just the item being sold, things like storage, shipping, raw materials, and overhead can be used in the overall cost of goods sold calculation. This means the combined total of these expenses can be tax-deductible.
The use of your personal assets for your business is also tax-deductible. If you use your home as an office, you may be able to deduct portions of the mortgage and upkeep as business expenses. The same goes for your personal vehicle based on mileage calculations.
Other items such as employee expenses, retirement, and insurance can be deducted as well. There are more than the items listed here. All are available to review on the IRS website.
Advertising and marketing are expensive and essential pieces to running your business. Fortunately, these expenses are tax-deductible as long as they are ordinary and reasonable. Items such as business cards and newspaper ads are able to be deducted from your taxes.
There are special rules in place for the deduction of medical insurance, but with the rising costs of healthcare, it is important to verify if you qualify. The rule of thumb is called the 10% rule, and it refers to the cost of your medical insurance premiums in relation to your adjusted gross income. If your medical premiums are 10% or more of your AGI, then you can adjust the portion that rises above that number.
Funding a retirement plan is not just an employer-sponsored idea. Self-employed individuals also should and do contribute to IRAs and other retirement options. A certain amount of these contributions are deductible each year. These deductions are able to be taken on funding to pre-tax plans such as IRAs.
Many types of work-related higher education are tax-deductible. Things such as tuition and student loan interest are able to be claimed. Furthermore, there are many tax credits available for various types of learning, leaving even more options to make your education work for you.
Pay Quarterly and at Year-End
As mentioned above, for people who are self-employed, there are additional taxes that need to be submitted to the IRS. To make sure these payments are spread throughout the year, the IRS requires the form 1040-ES to be filed with payments each quarter. This allows for an estimated social security and medicare tax amount to be calculated and remitted.
If you’re expected annual earnings change from quarter to quarter, you are allowed to fill out a new 1040-ES and submit payment for the adjusted amount in the following quarter. The form 1040-ES comes with voucher slips that can be used to remit payments via mail. Of course, with the prevalence of technology, you are also able to submit payments electronically through the IRS website.
For year-end payments, Schedule C is required to report the business information for the previous year. This is a separate tax from the self-employment tax as this is from the perspective of the business rather than that of the individual. You may also be required to file an information return to the IRS depending on your circumstances.
Types of Filing
The IRS offers free filing services to individuals whose adjusted gross income is $69,000 or less. There are fillable forms and online submission options available. There are also onsite offerings from the IRS, titled Volunteer Income Tax Assitance (VITA), that have trained volunteers to help with tax filing.
There are also multiple software programs available for free and for purchase that will walk through each form needed to appropriately file your taxes. Most of these programs offer all the necessary supplemental forms as needed based on the answers you provide. In many cases, these options are suitable for the relatively simple taxes of an individual.
Sometimes the entire tax process seems to be overwhelming, and professional touch is needed. In the case of self-employed individuals, a lot of the stress of tax time comes from fear of mistakes and the use of time required to do things right. If you are worried about your filings, don’t hesitate to seek out professional assistance. It is not necessary to have the entire process done by a professional, but a Certified Public Accountant (CPA) can help with small questions all the way up to the entire filing.
There are many things to know before you begin to file your taxes, so start small. Know your business and what types of expenses are standard in your industry. Save receipts, track mileage, and understand the forms you’ll be required to fill out. A little bit of forethought will save you a lot of effort come tax time.
Don’t sweat errors, as there are processes in place for amendments and changes if something does go awry. If you are worried about handling the process, however, ask a professional any questions at My Count Solutions. Small or large, it’s your business, make sure you are comfortable with the tax filing you’re going to submit.