As a freelance developer, you’re constantly juggling tasks, managing leads, and completing contracts, all while trying to grow your business. Then, suddenly, tax season hits, adding another layer of complexity to your already hectic schedule.
We understand how challenging it can be to balance running your business while also handling tax paperwork. So, if you need help with the tax-filing process, make sure to check out our guide. There are also a few tips on how to get valuable deductions for your solopreneurship.
Before we start, it’s important to know that while we strive to provide accurate information, this guide doesn’t replace the advice you can get from a tax attorney. Always consult with an attorney or tax professional for advice tailored to your business’s needs.
Keep Records and Be Organized About It
On the list of Dos and Don’ts of freelancing, you have to add being organized with your record keeping among the top 3 Dos. Also, the first Don’t of the list needs to be neglecting to consider the importance of proper tax management. This is a common mistake among new and even seasoned freelancers, but it’s one that can have significant consequences.
To make record keeping easier, consider using a specialized tool that can identify write-offs, set tax reminders, and track expenses.
Plus, don’t forget that you have to keep track of both income and expenses because each has a well-defined role when deciding the final value of your tax return.
The Income Records
Your income records include all your yearly earnings, such as the income included in form 1099-MISC, which you’ll receive from your clients. If you had more than one client, you might receive several 1099s. Your clients also send these forms to the IRS, so it’s important to report everything to avoid raising any red flags.
For payments made through third-party processors (such as Venmo or PayPal), clients don’t need to file the form, but the IRS may receive a 1099-K form from the payment processor if you received over $20,000 and had more than 200 transactions during the year.
As a freelance developer, you have the right to deduct business expenses from the totality of your income. However, writing off business expenses comes with a series of rules and conditions, as you can’t include any type of expense on this list.
First, for every expense you add, you’ll need to provide records as evidence. For instance, for expenses over $75, you need receipts, but you can also use credit card statements, bank statements, and/or electronic funds transfer records.
You can also add business driving deductions if you use your vehicle to drive to customers, but you have to keep a log of your mileage.
Marketing costs are another business expense that many beginner entrepreneurs forget about. As a developer, you need to build a strong personal brand, especially in online communities. So, you’ll have to invest in a few promotion campaigns to get your brand out there. Your costs with materials, creation, and even platforms that will promote your ads can be included under deductibles.
What Kind of Taxes Do You Pay as a Freelancer?
As a freelancer, you’re responsible for paying various taxes at the federal, state, and sometimes local levels.
Here are some of the taxes you may have to pay:
- Federal – paid to the IRS based on your net business income, minus other deductions and credits. Your tax rate will depend on the national tax brackets, which vary according to your taxable income and marital status. Plus, freelancers pay their own Medicare and Social Security taxes.
- State – most states (with a few exceptions) require you to pay state income taxes to their respective tax departments. These are generally due on a quarterly basis, coinciding with federal tax deadlines.
- Local – some local jurisdictions have their own tax requirements, and you might need to pay additional income tax, depending on your location. To learn more about local tax obligations, check with your local chamber of commerce website or office.
- Sales – a few states (West Virginia, South Dakota, New Mexico, and Hawaii) require you to collect and pay sales tax on services. In these cases, you’ll need to apply for a state sales tax permit to sell your services.
By understanding and staying on top of your tax obligations as a freelance developer, you can avoid potential issues and keep your business running smoothly. So don’t ignore this crucial aspect of your business!