Everyone was a freelancer in the 1700s, so it’s not surprising that Ben Franklin was able to sum up life in one sentence: "Tis impossible to be sure of anything but Death and Taxes" - this is a step by step guide to getting you through the inevitably uncomfortable period known as tax season
Assemble your income
The first step in getting through tax season is understanding how much you’ve earned throughout the year, and where it came from. This step involves summing up all of the income you’ve earned that was not already taxed (i.e. 1099 income). Technically, a client is supposed to send you a “1099 form” at the end of the year that describes the amount of money they paid you throughout the previous year. It’s important to note that if a client doesn’t send you a 1099 form, you still owe taxes on that income!
At the end of this step, you need to have:
- Total self-employment income (freelance, contractor, 1099 income)
- Total W-2 salary paid (if applicable - this is income from a traditional 9-5 job)
Now the “fun” part begins - let’s sum up the business deductions to reduce your taxes!
Assemble your deductions
If you’ve been tracking your business deductions (i.e. business expenses and mileage) throughout the year - congratulations! This is the moment where your diligent logging will pay off. For this step, you’ll want to sum up all of your business expenses and mileage from the previous year.
Your business deductions should be properly categorized into the main categories found on the Schedule C (Advertising, Car and Truck, Legal and professional services, supplies, office expense, Meals and entertainment, etc.). The most important group of expenses that needs to be properly categorized is your “Meals and entertainment” - the reason for this is that they are only 50% tax deductible. If you improperly categorize a Meals and entertainment expense as a different category (Supplies, for example) you could end up getting in trouble and owing money to the IRS.
Mileage presents another opportunity for huge deductions (if you’ve been tracking your miles). Miles driven for the purpose of business can be reduced at $.545 / mile driven. If, for example, you drove 100 miles in the year for business purposes (in a car owned by you, of course), then you could reduce your taxable income by $54.50! It’s important to note that if you decide to use the mileage deduction, you cannot include your business expenses related to owning your vehicle. Fortunately in most cases the benefit of using mileage deduction far outweighs the benefit of considering business expenses related to owning your vehicle.
At the end of this step, you’ll need:
- All of your business expenses categorized into the correct tax category
- The total amount of each of these categories
- The Meals and entertainment category should be divided by 2
- If you decide to use mileage deduction, don’t consider expenses related to owning your vehicle (i.e. gas, insurance, registration, etc.)
- The sum of all the miles driven in the previous year for your self-employed work.
Ok, the hardest parts are over! The next piece is knowing what you’ve already paid throughout the year.
Assemble your previous IRS and State payments
The IRS (and most state governments) require self-employed individuals pay taxes on their income quarterly (4X / year). If you’ve been responsible enough to handle this, great job! Your tax payment on April 15th will be reduced by the amount you’ve already paid; you might even receive a tax refund!
At the end of this step, you’ll need:
- Sum of quarterly payments you’ve submitted to the IRS
- Sum of quarterly payments you’ve submitted to the state government (if applicable)
Now you’ve gathered all the information you need to file your taxes! The last step is to choose how you’re actually going to file
Choose how you’ll file
Unless you have a complicated tax situation, most individuals will be best suited by choosing to use online software to file. You may want to consider hiring a tax professional if your income originates from financial securities or foreign countries, or if you have another unique tax circumstance. Here are your options for end of year tax filing, along with the pros and cons of each option.
Online software (Free - $60):
Pros: quick, simple, secure
Cons: cannot handle complex tax situations
Tax professional ($100 - $XXXXX?):
Pros: personal touch, custom experience, can handle any complicated tax scenario
- HR Block
- Local tax professional (CPAs will be more expensive because they are licensed professionals, but they will be able to handle any problem you throw at them)
Do it yourself (Free):
This is a terrible idea and we would not wish this option upon our greatest enemies… however, it is possible to follow directions, download, fill out, file and pay your taxes directly from the IRS website.
It’s file time, baby!
You’ve got everything you need - now it’s time to pull the trigger! Set aside a few hours during the weekend and just get it done. We recommend you file in March, long before the April 15 deadline. If you run into any issues during your filing, you’ll have plenty of time to solve the problem.
Tax professionals get really busy around April 15th. Millions of American citizens are seeking help from the same professionals at the same time; they might be too busy to help you out! Get your taxes filed way ahead of everyone else, and you’ll breathe easy in April.
You're done! Make it easier on yourself next time :)
If you had a rough time through this experience (like most Americans) you might benefit from being a little bit more “on top” of things next year. No better time than the present - read our advice on how to set yourself up for success next year.
Track.tax is a web app that calculates, withholds, and pays self-employment taxes. All freelancers struggle with running their "back office", let Track handle your taxes.
Have any questions? Feel free to reach out to us at email@example.com