HOW SHOULD AMERICAN FREELANCERS DEAL WITH THEIR TAXES?
You think hiding from ‘Avengers: End Game’ and ‘Game of Thrones’ spoilers was hard? Try to understand and follow the American tax system for freelancers and you’ll see what a real challenge looks like. On the upside though, no other problem in life will seem relevant to you anymore. It’s not like we’re trying to scare you, it’s just a friendly warning. We’ll do our best here to help you sort things out and not get audited.
When you work your regular 9-5 hours at the office, you file a W-2 form and it all seems easy-peasy-breezy, because taxes are being deducted from your paycheck automatically. You may, of course, file for deductions if you fall under certain categories of citizens. We won’t list them here since this article is specifically for freelancers. However, both employees and self-employed workers are supposed to go to the IRS website and read the docs which are relevant to their tax situation not to be in the dark completely.
To put it shortly, every freelancer should pay taxes if they work in the USA. No matter how much you earn, how many clients you have, and how you receive your payments. You have to file taxes for every single client you have, even if you wrote one subject line for some marketing email for $15. We’ll tell you more, you have to let IRS know even if you walked your neighbor’s dog once for little financial reward. Sounds ridiculous? Unfortunately, the US tax system is something that you’ll just have to put up with. Doesn’t seem to American-dream-y, does it?
So you have to file taxes 4 times a year: on April 15, June 15, September 15, and January 15. Apart from the usual income tax, you’re subjected to the self-employment tax which makes up 15,3% of your earnings. The overall percentage that you’re supposed to give back to the state is about 30% of the total profit. If you make an impressive sum of money, this number may go up to 40%. However, there are many opportunities to file for deductions, especially if you’re married, you own a house, have kids, and some other factors which you can find listed on the Internal Revenue Service website.
Opportunities for Tax Deductions
The tax system is not all sharp and cutthroat as it may seem, it’s rather flexible since it has many legal loopholes which may ease your tax burden. All your business related expenses can be subjected to deduction in case they are ‘regular and ordinary’. Thus meaning that if you need any equipment (like a laptop, headphones, sewing machine, etc.), if you travel for work, have business dinners, you have set up a home office, you can expect a significant deduction. Yes, all of this can reduce tax payments!
However, you need to be thorough with all receipts and documentation. Sometimes, IRS may decline deduction if your filed business expenses don’t really relate to your work. Also, the term ‘home office’ isn’t just any place, like a kitchen or nursery, where you can work. It’s a workspace equipped with all necessary stuff. And it can be checked any minute. Kinda ridiculous, but it’s really thoughtful of the government if we look closer at the issue.
Tracking Down Income
Being your own boss, receiving money for your work, and choosing clients may be all fun and games until the scary and horrible tax time comes. You’re supposed to file your whole income story which means you need to track down every single payment from every single client. Keeping all the documents is absolutely crucial no matter how much money you received. When it comes to all the expenses which fall under the deduction category stated above, saving every receipt is important as well. Even if it’s a coffee receipt from Starbucks, make sure you scan it and save it. Storing all the papers is useless since shop and restaurant receipts’ ink fades away with time. Use a special app which will help you to keep a track of the payments which go through your debit/credit cards and bank account.
By the way, using apps and different web platforms for filing your taxes isn’t the best ides ever. This process is incredibly complicated and has to be performed thoroughly and carefully. Artificial intelligence programs haven’t yet reached that level. They make mistakes, especially when it comes to calculating tax deductions.
Hire a Fellow Freelancer to Help You Out
Don’t think of a tax accountant as of an additional expense, think of them as of an investment which will save you much more money that you’re going to spend. It’s true, you can ask any experienced self-employed worker. Hiring a part-time accountant who specializes in the freelance sphere and small businesses so they know your pain and struggle and it will definitely pay off. Firstly, because you’ll avoid paying all the fees which can make up to thousands of dollars. Secondly, an experienced accountant will find all tax deduction opportunities and you’ll end up paying even 3-4 times less.
The American tax system is rather complicated, however, at the same time, it’s not the worst in the world. For example, if you’re a small business owner in Venice, you’ll have to give back to the government 60% of your income. So it’s not easy, but fairly tolerable.