The coronavirus pandemic has altered the way Americans work. Many have lost their jobs. Others are dealing with reduced work schedules. This has led many to consider independent contractor and freelance work to supplement their lost income. Prior to COVID-19, an estimated 57 million people worked as independent contractors, according to Upwork. That number, however, is likely to climb as the pandemic continues.
New work-from-home and social distancing guidelines make freelance work more attractive than ever. Flexible schedules, diverse client portfolios, and the ability to set fees are just some of the perks that attract people to freelance work. Of course, like any other business, you’ll be expected to pay taxes and file a return. Depending on where you live, you could be responsible for both state and federal taxes. This post will concentrate on the federal taxes you’ll need to pay, as well as ways to reduce your tax liability.
Independent Contractor Taxes
If you are considering freelance work, keep in mind that there are certain taxes you will need to pay to the Internal Revenue Service (IRS).
As an independent contractor, you should receive Form 1099-MISC from those you do business with each year. This form should be sent to you by January 31. If a client paid you less than $600, you will still need to report the income on your return, even if you don’t receive a 1099.
In addition to your federal income tax, you will also need to pay self-employment tax, which includes Social Security taxes and Medicare taxes. A traditional employee has a portion of these taxes paid by the employer. As a freelancer, however, you are responsible for the full amount. Currently, the self-employment tax rate is 15.3% (12.4% for Social Security and 2.9% for Medicare) of your net business income. To determine how much you owe, use IRS Schedule SE (Form 1040).
Calculating Quarterly Taxes
You will need to pay your federal income tax and self-employment taxes four times a year – April, June, September, and January (Please note that the April and June payment deadline has been extended to July 15, due to COVID-19), unless you earn under $1,000. To determine how much you will need to pay in estimated quarterly taxes, you can use Form 1040-ES. Keep in mind that you may also pay your estimated taxes weekly, bi-weekly or even monthly. This may help you from falling behind. There are two easy ways to make payments online:
- Electronic Federal Tax Payment System (EFTPS) – Allows you to schedule payments up to 365 days in advance, change or cancel payments, and track your payment history.
- IRS Direct Pay – Direct Pay is a good option if you are making a one-time payment.
In addition to your federal taxes, you many also owe state and municipal taxes. Check with your local and/or state tax authority to determine your tax responsibilities, and when payments are due.
Common Tax Deductions for Independent Contractors
As an independent contractor, you may pay more in federal taxes than if you worked for someone else. But, depending on the nature of your business, you may be able to decrease your overall tax liability with these common tax deductions for those who are self-employed.
1. Home Office
If you use all or a portion of your home to run your business, you may be able to deduct a portion of your mortgage or rent, utilities, property taxes, repairs, and other expenses. You can use the simplified option, which allows for $5 per square foot that is used “exclusively and regularly” for business (up to 300 square feet), or you may use the percentage method. For example, if your business space is approximately 5% of your total home’s square footage, you can deduct 5% of your home’s expenses. Check out IRS Publication 587 for more information on this type of deduction.
2. Additional Space
Do you pay rent or mortgage for office space outside your home? If so, you can deduct this expense on Schedule C (Form 1040). This could include storage units, workshops, and other facilities not located in your home.
3. Office Supplies & Equipment
Office supplies, such as paper, ink toner, and shipping envelopes are a deductible expense. Be sure to retain receipts and keep them separate from any purchased for personal use. You can also deduct equipment used to run your business. Use Form 4562 to calculate the depreciation of computers, printers, and other office equipment.
You may be able to deduct self-employment health insurance premiums for yourself and your family, if you’re not eligible for coverage on another plan. In addition, your business must show a net profit. The deduction is taken on Form 1040 and does not apply to your self-employment tax. Other insurance deductions may include a portion of your home (Form 8829) or auto insurance, as well as other business insurance. These deductions are taken on Schedule C.
5. Retirement Plans
If you open an individual retirement account (IRA), the contributions you make can help reduce your taxable income.
6. Self-Employment Tax
As an independent contractor, you’re responsible for paying 100% of your Social Security taxes and Medicare taxes. The good news is that you can deduct 50% of those taxes, which will reduce both your income and self-employment taxes.
7. Professional Memberships & Subscriptions
Are you a member of a professional association? Do you subscribe to professional journals or publications? If so, your membership dues and/or subscription fees may be deducted as a business expense on Schedule C.
8. Advertising & Promotion
It’s nearly impossible to run a business without any type of advertising or promotion. Here are just a few of the expenses you might incur and can deduct on Schedule C:
- Website creation & hosting
- Promotional brochures and fliers
- Business cards
- Digital advertising
- Direct mail postcards
9. Business Travel & Meals
If you have to travel to meet with clients or potential customers, or for other business purposes, you may be able to deduct certain expenses. Typical business travel expenses include transportation, lodging, tolls, parking fees, and meals. Meals are calculated at 50 percent. Automobile expenses can be calculated by using the standard mileage rate of $.58 per mile. Another option is calculating actual auto expenses and depreciation, and then multiplying the amount by the percentage used for business. For more information on these types of deductions, refer to IRS Topic No. 511.
Independent Contractor Tax Help
Taxes are complicated and often intimidating, but you don’t have to figure it out on your own. At Tax Defense Network, we have a team of tax professionals who can help you prepare your Schedule C and other tax forms. And here’s the best part, a portion of your fees may even deductible as a business expense. Whether you’re just starting out or you’re a season freelancer, call us today for a free consultation.