Side-Income Tax Guide For Freelancers And Solopreneurs

Working for yourself, either as a freelancer or solopreneur, requires you to wear many hats. There is a lot to manage and keeping up with taxes can be one of the trickier parts. But it is also one of the most important.

Knowing your self-employment tax obligations and having good tax routines in place can make taxes less overwhelming. Organized systems, clear knowledge of what you need to track, and sticking to filing deadlines will help you stay compliant and avoid penalties. Designed for self-employed women doing it all, this reference guide takes the stress out of taxes.

Karla Dennis, a tax advisor and founder of KDA Inc., stresses the importance of record-keeping. Calling it the golden rule, she advises freelancers to track all income and expenses using a spreadsheet or accounting software. 

Accurate records make paying quarterly taxes and filing tax returns easier. You should keep up-to-date records of profits and losses and hold on to all receipts. If you use your car as part of your business, track gas mileage and auto expenses. For any equipment, document the purchase.

Since taxes are not automatically withheld for the self-employed, you need to set money aside for paying your taxes. The Fiscal Femme reports that forgetting to do this is a common freelancer mistake that can have painful and expensive consequences.

To prevent that, make it a habit to set aside a percentage of every payment you receive. The Fiscal Femme recommends starting with 30% and adjusting based on your revenue. You should also consider having a separate tax account for these funds. If you do not see the money, you will not spend it. To further simplify things, automate the transfers to the account so you never forget.

Unlike salaried workers, freelancers and solopreneurs need to pay self-employment taxes if they expect to owe at least $1,000 in taxes when they file their return. Estimated payments are due four times a year and are separate from the annual tax return.

The IRS splits the year into four payment periods with a specific due date for each quarter. If you miss a payment or do not pay enough by the due date, you risk having to pay a penalty. You can be penalized even if you receive a refund from your annual tax return. To prevent this, make a note of the quarterly due dates, which fall on the 15th of January, April, June, and September each year.

The self-employment tax is 15.3% and covers Social Security and Medicare contributions. If you do not use an accountant, it is important to know how to accurately calculate how much you need to pay. 

First, add your self-employment income and subtract all your business expenses and deductions. Multiply by 92.35% and then multiply the result by 15.3%. Or, to keep things simple, you can use a self-employment tax calculator.

To decrease your tax bill, make sure you take advantage of self-employment deductions. The IRS has a complete list available, but some of the bigger deductions to remember include: 

• Home office: You can deduct a percentage of your mortgage, rent, property taxes, utilities, repairs, and expenses if you use part of your home for your business.
• Self-employment tax: You can deduct half of your self-employment tax.
• Continuing education: This includes tuition, books, supplies, fees, and transportation for work-related education that strengthens relevant skills.
• Startup costs: This includes money spent to get your business up and running, such as grand opening advertising, consulting fees, and organizational fees.
• QBI (qualified business income): If your total taxable income falls below a certain threshold, you may be able to deduct 20% of your taxable business income on your return.