Full-time freelancers filing taxes: what to do between now and April 15th
February 11, 2019
April 15th can be a busy day for the self-employed. Aside from your annual taxes from the previous year, your quarterly estimated taxes for the 1st quarter of this year are due as well. This may seem like cruel and unusual punishment, but since you’re in charge of your schedule, you can plan to take a day or two off to recover if needed. If you still need to file your annual and quarterly taxes, here are a few things you can start doing to get ready.
Step 1: Having the right documents on hand
Time to gather some documents! Chances are, your physical mailbox has been filled up in the last month with all kinds of tax documentation you need. You also may have some documents filed away throughout last year, and you might still need to login to certain accounts to retrieve a few more.
Documents you will need include a report of your earnings, such as your 1099s, maybe a Schedule K-1, P&L statements, and account statements. You will also need expense documentations and receipts, and proof of any quarterly payments you made (Form 1040-ES).
Here are some forms you may have received from your bank, your client, or the government:
- Form 1099-MISC reports income you earned from each client that pays you at least $600. You should have received this by January 31st. Even if you didn’t receive a Form 1099-MISC from one of your clients, you’ll still have to report the income.
- Form 1099-DIV – If you own stock or mutual funds and earned dividends, you can report your earnings using this form. This does not include earnings sold from stocks.
- Form 1099-INT – This form reports interest you may have earned from your bank, such as from your savings account.
- Form 1099-G reports any income you may have received from the government, such as unemployment.
- Form 1099-R – If you had to withdraw money from your traditional IRA, you may receive this form that reports the taxable amount of the distribution as well as the amount of federal tax withheld.
- Form 1099-C– This form reports debt cancelled on your behalf, such as your credit card company cancelling your debt. Even if this isn’t actually income received, you would still need to report this.
Other things you might want to gather up (note, this list isn’t exhaustive):
- If you have an Health Savings Account, look out for a 5498-SA form in the mail showing your contributions
- Records of any state or local income tax paid above and beyond wage withholding – including vehicle taxes
- How much you paid in educational expenses
- The cost of any child care expenses
- Documentation of personal property taxes and any mortgage interest
- Medical expense records
Step 2: Filling out your return
So, you know you need to file, but what should you fill out? You may find this Library of Tax Forms, written by TurboTax, brought to you by bSolo, helpful. If you have spent money on your business, you’ll want to figure out what deductions you can take to save on your taxes. If you used a vehicle for business purposes, used a part of your home for your home office, or even had cellphone expenses for your business, you may be able to write it off. You’ll want to refer to this tax deductions guide for freelancers. If you wish to use a tax service such as TurboTax, you can save $20 on TurboTax Self-Employed. Or, you can always stop by your favorite accountant if you would like assistance. Make sure to call ahead and set up a time so you can get a spot.
Step 3: Contributions to long-term or health savings
Being self-employed means you’re responsible for your own long-term savings—but it also presents a great opportunity to reduce your taxable income. Depending on your personal situation, you may find one option more appealing than another. Here are the pros and cons of each long-term savings plan when considering.
Pro tip: You can contribute to your IRA for 2018 up to April 15, 2019 or April 16, 2019 if you live in Maine or Massachusetts. This contribution could decrease the amount of taxable income you are liable for.
Also note, if you worked for an employer the previous year, you may rollover your 401K into an IRA. Please consult a financial expert to determine the best method and amount for your situation.
|Traditional IRA||Up to $6,000 in 2019 or $5,500 for 2018, optional $1,000 catch-up contribution if age 50 or older||-You get tax deductions on your contributions for the year
-May rollover your 401K from your previous job
|-Withdrawals during retirement will be taxed
-Will face penalty if you withdraw before retirement
|Roth IRA||Same as Traditional IRA|| -Withdrawals during retirement will be tax-free
-Allows you to withdraw contributions, but not earnings, tax free and penalty free anytime
-May be more attractive for those with lower income
|-You may rollover your 401K from your employer if it was also a Roth IRA but most 401Ks from employers are traditional by default
-No immediate tax deductions
-Has an income limitation
|SEP IRA||Up to $56,000 in 2019 ($55,000 in 2018) or up to 25% of your net earnings, whichever is less||-Contributions are tax deductible
-Annual contributions not required
-More simple than the Solo 401K
|-Withdrawals during retirement will be taxed
-Has a $280,000 limit on compensation
-No catch-up contribution available
|Solo 401k||Up to $56,000 in 2019 or 100% of earned income, whichever is less. Optional catch-up contribution up to $6,000 if age 50 or older||–May appeal to those who can and want to save a lot of money for some years and less for others||-Requires filing paperwork to the IRS each year if you have more than $250,000 in your account
-Can be a bit complicated to maintain
|Simple IRA||Up to $13,000 in 2019 ($12,500 for 2018), optional catch-up contribution up to $3,000 if age 50 or older||-Contributions are tax deductible||-Withdrawals in retirement will be taxed
-requires heavy paperwork
-Early withdrawals are taxed as income with 25% penalty during the first two years (including rollovers) and 10% after that
|HSA (Health Savings Account)||up to $3,450 if single or up to $6,900 for a family||-Offers tax advantaged savings for qualified medical expenses, including doctor or hospital visits, co-pays or prescription drugs
-Can take with you if you had this from a previous employer
-Can rollover savings to next year
-Can use funds for qualified expenses anytime and non-qualified expenses without penalty after age 65
–Can invest HSA in stocks or mutual funds
|-Requires you to be on a high-deductible health insurance plan (HDHP) with a deductible of at least $1,350 if you are single and $2,700 for a family plan
-Can’t be enrolled in other medical coverage including Medicare
-Can’t be claimed as someone else’s dependent on a tax return
-The maximum out-of-pocket expenses for the year is $6,650 if you are single and $13,300 for a family plan
Step 4: Finalizing your annual return
Once you’ve figured out your annual return and your long-term savings contributions, you’ll want to figure out how you want to pay for your state and federal taxes or how you want to receive your refund if applicable. Options to pay your taxes can be done online, through the telephone, or with check or money order. You may be able to pay with a payment plan if you qualify.
Step 5: Filing Your Q1 2019
Congrats on finishing up your annual tax return! You’re almost there. You may have experience filing your estimated quarterly taxes, but if you don’t, it’s pretty similar to filing your annual taxes.
One option to figuring out your quarterly estimated taxes is the safe-harbor payment. This allows you to pay 100 percent of last year’s taxes or 110 percent if your last year’s adjusted gross income was more than $150,000 (or $75,000 if married and filing separate returns). You can divide your 2018 annualized income by 4 to get an estimated quarterly amount.
Another option to find what you owe for Q1 2019 is to find your net position. Figure out your earnings and your deductible expenses for the quarter. Like filing annually, you’ll want to keep receipts of what you spent on your business to find your deductions. The difference is you would only deduct for the first quarter. Subtract your deductible expenses from your earnings to get your net position. Find your tax bracket to figure out what percentage of your taxable income you may owe.
It can be easy to overlook having two tax events on one day even though they may seem very similar. For your annual taxes, you may get a refund or owe payment. For your quarterly taxes, if you earned money in the first quarter, you’ll need to submit an estimated payment. Get more information on calculating and paying your quarterlies here.
The content in this article was written for full-time self-employed professionals. If you have an employer and freelance on the side, some of the material may not apply to you. Please refer to your financial advisor and or a tax professional for your specific situation. Happy filing!