When it comes to work, many find that freelancing can offer freedom and flexibility that is not present in the everyday 9 to 5 job. Freelancing can be a lucrative source of second income or work well for travelers, work-from-home parents, writers, teachers, artists, and online tutors. The upside of freelancing is that you are only limited by the time and effort you invest in freelancing. The downside is that government still requires us to pay our share of taxes. Not only are you responsible for paying your taxes on your own, but you also have to determine the estimated percentage you owe each quarter or be penalized when it is tax time. Filing as an independent contractor can be daunting, so here are a few tax tips to keep you in the green with the IRS.
Tax Tips # 1.Keep track of your income
Taking an online tutoring job as a freelance contractor does not automatically come with a W2 at the end of the year. While you will be required to fill out a W-9 with the company you have begun working for, you are not necessarily going to get a 1099 or W-2 at the end of the year. Here are a few programs that will help you keep track of your payments for your freelance work.
●PayPal- PayPal is one of the easiest money platforms for invoicing and receiving payment for work. With PayPal, you can track your invoice payments each year by searching your activity and entering the range of dates you wish to query. I used PayPal last year to estimate my income from a grant research contract after the person I was contracting with failed to send me a 1099. Had I not been receiving payments through PayPal, I would have struggled because I made the mistake of not tracking my payments. PayPal saved me time and the headache of searching through bank accounts and my files at tax time. The downside is that not every contract will allow you to use PayPal, but it is a valuable tool for freelancers and small business owners.
●Excel- Excel has been around since before Microsoft gave us an animated paperclip as an assistant. But it has more bells and whistles, and you can use Excel to not only track payments received, but also business expenses. As an online tutor, you will have business expenses like printer ink, internet access, and pens and pencils and other miscellaneous purchases. Keeping track of those purchases on an Excel sheet will help you when it comes time to file your taxes since you can write these off (more on that in a minute).
●QuickBooks- This program has a plan for everyone from large corporations to small business owners. As an online tutor or contractor, you are self-employed and can benefit from QuickBooks programs to help track payments, invoices, profits, your bank accounts and even estimate tax percentages each month. As a freelancer, it can be one of your more helpful tools, especially if you prefer a one-stop destination that keeps you more organized and tracks it all for you.
Tax Tips # 2. Have a savings account or fund set aside for taxes
According to thebalance.com, it is advisable to set aside 25-30% of your freelance income to cover your taxes. The best way to ensure you save toward your taxes is to make a payment into your savings account as soon as you receive your payment. Another way to do this is to set up a bank account strictly to receive your freelance pay, separate from your household account, with bank transfer capability established so that you can transfer 70% to your household account, leaving the rest for taxes. Doing it this way will keep you from putting off depositing your tax percentage.
Tax Tips #3. Be aware of how your income will affect your tax bracket.
Freelance income could increase your tax responsibilities. Income tax withholding estimations can be found on irs.gov to help you determine your tax percentage liability. Another helpful website is smartasset.com which has a Federal Income Tax Calculator.
Tax Tips #4. Keep track of your expenditures
You can write-off part of your cell phone plan, your internet and Wi-Fi plan, office supplies, printer ink, paper, and even your laptop can be considered deductible expenditures. Just be sure to properly estimate the amount these things are used for business and not personal use when you are filing your taxes. For example, if you use your internet about 25% of the time for your work, you would enter 25% of what it cost you for the year when deducting it as a business expense. Also, if you travel for work, keep track of your gas receipts and mileage, those are deductible as well.
The best way to keep track of these expenses is not only to track it in Excel or a program like QuickBooks, but also keep a file of your receipts and invoices. Scan them or take a picture and keep them on your cloud, just in case your originals are lost or misfiled.
Tax Tips #5. When in doubt, seek help
Tax time and finances can be confusing and tricky for many freelancers. The days of EZ file and quick estimations are gone once you go into business for yourself or incorporate a side hustle. An accountant can assist you through the process and tracking so that you can continue to focus on your freelance work. If you are at all in doubt when it comes to taxes, pay a professional to help you through it. It is simply another business expense you can deduct, and it will help you maintain peace with the IRS. Tax penalties and fines add up. Having an accountant will ease the stress of trying to manage your finances without knowing what you are doing.
As the saying goes, the only sure thing in life is death and taxes. You don’t want to end up in the same boat as Wesley Snipes, Martha Stewart, and Annie Liebowitz. Unfortunately, the responsibility ultimately lies with you. Follow these tips to be well on your online tutoring way to being comfortable if the tax man ever rings your door.