Whether you’re a self-employed writer, editor, or another type of freelance worker, the 2020 tax season may have you stressing about this upcoming spring. Freelancers have, generally, done well during the COVID-19 crisis; however, some of us may have seen a decrease in business leads due to corporations and small businesses looking to reduce payroll. As you start to collect your materials for filing your 2020 taxes, remember to count any supplementary income: unemployment benefits, small business aid, and more.
Self-Employed Freelancers and Withholdings
For the majority of standard civilian workers, a weekly or bi-weekly check is dispersed to them by the company they work for. This paycheck usually has taxes and other amounts withheld from its total; a W-4 form is used to determine the amount that should be withheld from the employee’s check. Unlike most other employees, self-employed freelancers and business owners usually do not have this option.
If you’re new to freelancing, or are finally making enough money to need to consider paying a fair amount in taxes, you’ll want to start looking at your income. Start viewing your clients’ payments as a portion of a paycheck, rather than a private payment or gift. Since you’ll be reporting each payment as income for your business, you may want to look into starting a spreadsheet or PayPal Business account to track all of the funds you receive.
Create Your Own Withholdings for 2020 Taxes
Based on the tax bracket your business falls into, you can get ahead of the game by setting aside tax money into a separate business account. This way, come the quarterly tax deadline or your end-of-year tax filing, you won’t be scrounging for payment to the IRS. If you choose to do this, make sure you take into account the 15.3% you are responsible for in both social security and Medicare taxes.
Quarterly 2020 Taxes for Freelancers
“Individuals, including sole proprietors, partners, and S corporation shareholders, generally have to make estimated tax payments if they expect to owe tax of $1,000 or more when their return is filed.” –IRS
Estimated tax payments are due via a 1040-ES as follows:
January 1 to March 31 – April 15
April 1 to May 31 – June 15
June 1 to August 31 – September 15
September 1 to December 31 – January 15 of the following year
Note: If these due dates fall on a Saturday, Sunday, or legal holiday, the payments are due the next business day.
If you have repeat clients, you should receive one of these forms from each of them. These forms will list, officially for both parties, the amount of money and payments that have been transferred between you. These documents make it easy to report your income and 2020 taxes; however, if you do not get these documents from your clients, you’ll have to make sure you have a record of each payment you have received.
Self-Employed Tax Deductions
If you’re like most Americans, you’ll want to reduce your taxable income as much as possible. You can do this in a number of ways, including retirement accounts, stock investments, charitable donations, religious gifts, and making purchases that will be used for your business.
Additionally, if you have a dedicated space in your home that you use for your freelancing work, you can deduct the expenses for keeping that space up and running. If, for example, you use your internet or phone connection 25% of the time for your work, you can deduct 25% of the total internet and phone bills. If you’re interested in claiming deductions for your home office, make sure to save any and all receipts for each item or service you purchase.
There are many other deductions that you may qualify for, like “Bad Debt”. According to Money Under 30, “Bad debt means you have billed someone for your services, never got paid, and have no way of collecting the money. To deduct a bad debt, you must have previously included the amount in your income. It’s like keeping a receipt—if you can’t prove that you’re owed that money, you can’t deduct it.”
Above all, don’t make the mistake of thinking that every dollar you receive is yours. Your taxes aren’t automatically deducted from your paycheck like other employees in the business world. If you keep this in mind, collect all of your receipts, and maintain diligent reporting of your clients and income, you’ll be all set come time to file your 2020 taxes return. Are you prepared?