Paying taxes are important for anyone but especially for self employed people. When you have a traditional office job, the company you work for takes care of most of your tax details, making payments towards your taxes with each paycheck. Freelancers, however, have to take care of everything themselves.
Step One: Set Your Tax Budget
Most experts recommend saving 25-30% of your income to put towards your taxes. Now, that may sound like a big drag but if you factor that into your freelance rates as a regular business expense, it shouldn’t be too much of a hassle. Using a digital banking app like Cogni can help. Using special savings buckets, you can automatically set aside your desired taxation percentage with every payment you receive. Using this tool, you won’t have to worry about spending it accidentally and you’ll definitely have it when tax time rolls around.
Step Two: Make Quarterly Payments
Self-employed people are supposed to make four tax payments per year. If you don’t make them and pay all your taxes at once instead, there is a typically small financial penalty. However, most freelancers like to pay quarterly taxes because it reduces the overall financial blow of paying taxes for the whole year all at once. Check the IRS website to see the due dates for each quarter. Use form 1040ES before each due date to make your payments. If you accidentally overpay, don’t worry, you’ll get a refund when you file your taxes for the full year.
Quarterly payments can be filed and paid through snail mail or online. Both are valid methods, but with an online payment, you never have to worry about anything being lost in the mail.
Step Three: File Your Annual Taxes
Your annual tax return must be filed around April 15th every year, for the previous year. Freelancers typically use Schedule C to report income and expenses, and Schedule SE (Form 1040) to pay self-employment tax. Schedule SE ensures that you will get credit towards social security payments in the future even though you are self-employed.
Self-employed people may do their taxes themselves, but since it is a bit more complex than taxes for traditionally employed people, many find it is useful to hire a tax professional who specializes in working with freelancers. Others use helpful software that has special versions each year for business owners and self-employed people.
Again, taxes can be filed and paid online or through the mail, but most tech-savvy freelancers appreciate the efficiency of “e-filing.”
Self-Employed Tax Deduction Tips
One major tip for self-employment taxes is to make sure you maximize your deductions. Keep track of all your expenses and hold onto the receipts. Cogni uses smart expense categorization which makes it easy to have a total on different categories when doing your taxes. No more spending hours at tax time adding up receipts
Other major deductions include a home office deduction. In order for your deduction to be completely legitimate, you must have a dedicated space in your home that is used only for work. Deduct the portion of your rent or mortgage and utility costs that go towards that space.
Anything and everything can be a deduction. Paper, professional development classes and even your health insurance can usually be deducted, which reduces your overall income and the amount of taxes that you owe. Track the mileage that you drive for work because that and a portion of your yearly vehicle expenses can also be deducted!
Hopefully, your self-employed taxation process will be a bit less painful, with a little help from Cogni. Sign up for our waitlist to discover more ways Cogni can help you save time and money.