Are you ready to file your freelance taxes?
Quick disclaimer here, I am not a tax expert. Nothing in this newsletter constitutes tax, financial, or business advice. This information is simply what I’ve learned in setting up my own business. If you have more questions about taxes, you should consult a tax expert.
Taxes can feel complicated and overwhelming, even if you’re not a freelance writer. But the more you educate yourself and prepare early, the better your tax experience will be.
Consider this your crash course to freelancer taxes. This isn’t everything you need to know, but it’s a good start! There’s a lot to cover, so let’s dive in.
To make them less scary, keep up with your bookkeeping from the jump! Don’t be afraid to hire help when it comes time to file – it’s 100% worth it – even if it’s just a TurboTax expert.
Freelance Friday
Here are the five things you should know about taxes before you start your freelance writing business.
1. How much should I set aside for my taxes?
Each time you get paid, no matter how big or small the payment is, you should set aside 20-30% of that income for taxes. You may or may not need to use all of this money when it actually comes time to file your taxes, but you don’t want to be unprepared when tax season rolls around.
This is for…
federal self-employment tax 15.3%. (12.4% for social security and 2.9% for Medicare).
state taxes which is 15% on average but varies from state to state.
2. LLC vs. Sole Proprietor for freelance writers
Sole Proprietor
A sole proprietorship is an informal, unincorporated business that isn’t legally separated from its owner. A sole proprietor is entitled to 100% of the business's profit but is also responsible for 100% of the debt and risk, including lawsuits.
You don’t have to do anything to set up your sole proprietorship. You just use your social security number to file your taxes. You can (and should) get an EIN, basically a social security number for your business, for free from the IRS .
LLC
An LLC is a US business structure that combines the limited liability protection of a corporation with the simplicity and pass-through taxation of a sole proprietorship. Limited Liability protects a business owner’s personal assets (e.g., car, house, and savings) in the event that a business is sued or defaulted on a debt.
The main LLC cost is the state filing fee, which ranges between $40 and $500, depending on your state.
Sole Proprietor vs. LLC Tax Benefits
A Sole Prop. and an LLC are essentially taxed the same way unless you choose to become an S-Corp. An S corporation (S corp) is an IRS tax status that an LLC can elect. S corp status allows business owners to be treated as employees of the business (for tax purposes). S corp tax status can reduce self-employment taxes and will allow business owners to contribute pre-tax dollars to 401k or health insurance premiums.
With S-Corps and LLCs you must be extremely diligent with keeping your finances separate. You will have to pay yourself a paycheck.
3. Do I need to pay quarterly taxes?
For your first year, you do not have to pay quarterly taxes. But you will eventually, so listen up!
Usually, you will be charged a penalty for not paying quarterly taxes if you owe $1,000 or more per quarter when it comes time to file. So if you go to file your taxes in April and you owe more than $4,000 in federal taxes, then you may incur a fine. If you owed exactly $4,000, your fine will be less than $100, and it’s no big deal! This threshold changes from year to year.
If you don’t trust yourself to actually save that 30% we recommended setting aside, you may want to pay $1,000 per quarter directly to the IRS anyway so that you can’t spend it on other stuff.
4. What if I can’t pay my taxes in full on April 14th?
The IRS offers payment plans! If you choose a short-term payment plan (pay your taxes in 90-180 days), it’s interest-free. If you need more time than that, you will have to pay interest.
Don’t put off your taxes just because you’re not sure if you have enough money! You can pay any amount at any time with payment plans – there’s no payment schedule.
5. Do I need an EIN?
An EIN is basically a social security number for your business. I recommend every freelance writer gets an EIN! They’re free to get and take ~5 minutes to register. You’ll still file your taxes and do business under your own name with an EIN.
If nothing else, an EIN protects you from identity theft. Having an EIN also allows you the opportunity to file for bankruptcy if you need to down the line. You must have an EIN if you hire employees (not 1099, but W-2), become a corporation (LLC), or have a solo 401(k) retirement plan (SEP IRA).
Try This:
Taxes are due on April 18th. Take some time to schedule out getting your taxes done! I personally use TurboTax (this isn’t sponsored!), and it usually takes me about 2 hours if I’ve kept up with my bookkeeping.
Follow these steps to get them done!
Schedule 2-3 hours to get your taxes over with
Gather everything you need:
bookkeeping software/spreadsheet/book
1099s
1095-A form
tax prep software
EIN
banking info
Get into your tax prep software and get started!
Pay your taxes or set up a tax payment plan!