Whenever tax season rolls around, it’s easy to feel overwhelmed by all the forms you have to fill out. Navigating taxes can be confusing enough for the average person and even more so for freelancers who file their taxes quarterly.
That’s where we can help.
Are you a sole proprietor, a limited liability company, or a corporation?
Our first question to freelancers is always, “what kind of legal entity is your business?”. Freelancers are taxed based on whether their business is a sole proprietorship, a limited liability company (LLC), or a corporation. Out of the three, sole proprietorships and LLCs are the most common.
Sole proprietorships are unincorporated entities where the owner is the company. This means that the owner is personally liable for all of the company’s liabilities and debts; profits and assets of the business are also theirs. Since sole proprietors are responsible for stating their company’s profits and losses, in addition to self-employment taxes, healthcare, social security, and more, there are several forms they are required to fill out. The IRS provides a comprehensive list here.
Limited liability companies are unincorporated entities where the company and owner are legally separate. Therefore, LLC owners are not personally liable for the company’s debts or liabilities. Since profits of the business are either split amongst shareholders or go entirely to the owner, LLCs are taxed differently depending on their organizational structure. If they only have one shareholder, they are taxed as a sole proprietorship; if they have more than one, they are taxed as a partnership. LLCs taxed as sole proprietors are responsible for the same forms listed here, while those taxed as partnerships are responsible for the list here.
It’s also important to note that any client that pays you $600 or more should also send you a 1099-MISC form by the end of the fiscal year—if not, reach out to them.
But what happens if you don’t pay your taxes? Don’t stress—you will be subject to a late penalty fee by the IRS but the world won’t end. Check out our blog post on this topic and what you can do here.
What counts as income?
Any regular profits over $400 annually derived from your business, including providing services, are considered income. If you’re a blogger or influencer, profits from personal or sponsored videos, social media posts, and events count. This also goes for any free products or PR kits you receive with your job. For example, if you’re a beauty vlogger that received a $50 lipstick kit to review, the lipstick kit counts as income. For these, you just need to include the selling price of the product on your income tax return.
What counts as a deductible?
Deductibles are any expenses that are ordinary and necessary for your business. They are expenses you include on your statements you can deduct from your income—reducing the total amount you’re taxed on.
These would typically include office supplies, website domain fees, travel costs for business meetings, company dinners, and more. For many freelancers, internet access costs, SEO, and other services, as well as equipment like phones, laptops, and cameras, can count if they’re necessary for your work. Similarly, if you use your home for work, then part of your home expenses can be claimed, but only for areas that are used for your business.
Keep in mind that any expenses that are not ordinary or necessary should not be listed as a deductible. False deductibles that are intentionally listed count as tax evasion. The taxpayer is subject to a 20% increase on what they owe to the IRS and potentially has a criminal charge listed on their record. Of course, honest mistakes also happen all the time. If this happens to you and you realize it early on, contact the IRS and inform them of the error as soon as possible. In cases where the IRS contacts you first, you simply need to explain the mistake—,at worst, it’s considered negligence, and you’re subject to a 20% penalty.
Need help navigating your taxes?
Taxes can be tricky if you’re a freelancer. If you’re having trouble or have any questions, our team of professionals is more than happy to help – book a meeting or call with us!