20 Oct From the Frequently Asked File…Answers to Tax Questions Every Freelancer Needs to Know
Savvy freelancers know that proper tax planning can provide significant financial benefits that contribute to business growth. In this spirit, take note of these answers to frequently asked tax questions which can help to position your business for success:
1. Should I use a software system to track my freelance finances? Yes. Managing your tax and financial information with an accounting solution designed with freelancers in mind is invaluable. By having a reliable system for tracking this information you’ll be in a better position to control income and expenses as well as having the information you need when it comes time to pay taxes.
2. What are my tax obligations? Even seasoned freelancers can get confused about what taxes they need to pay. When you are self-employed, you are responsible for withholding your own tax payments because you don’t have an employer who does it for you.
Freelancers need to pay quarterly estimated taxes on the income they earn. Setting aside one-third of your net profit for taxes is a good rule of thumb, however, the exact amount will vary depending on the state and local tax jurisdictions you operate in. In addition, you are responsible for paying employment taxes such as Social Security and Medicare.
Depending on the type of business you have, and where your business operates, you may also have sales tax obligations. Sales tax is specific to state and local tax jurisdictions, so connecting with a CPA who is familiar with your geographic sales tax regulations can be helpful.
3. What tax deductions do I qualify for? The number and type of deductions your business qualifies for will vary on your business activities, but in general eligible business tax deductions include advertising expenses, business insurance, interest paid on your business credit card or business loans, legal fees and other professional services, rent or dues on a workspace, routine office supplies, and travel, meal and entertainment costs related to legitimate business purposes.
4. What receipts do I need to keep and for how long? You need to keep receipts for all of your deductible business expenses and file them where you keep the related tax return records. It is advisable to keep your tax documentation for at least 3 years.
5. Can I claim both the home office deduction and co-working space expenses? If you primarily work from a home office, but meet clients at a co-working space on occasion, then you may be eligible to claim the cost of using the co-working space for meetings as a business expense and the standard home office deduction, if you qualify for it. For the home office deduction to be applicable, you must have a designated space in your home that is your main place of business, i.e. you run your business from your home and do all of your administrative and most of your work functions there.
6. Should I incorporate my business? Considering which business structure or entity type through which to operate your business is extremely important when it comes to mitigating your tax burden. Incorporating your business offers a myriad of tax advantages, but it may not always be the best entity structure, depending on your state and local taxes. A prime example of this is in New York City where state and local tax regulations make corporations not as efficient for small businesses in comparison to other business structures
7. Do I need to get professional tax help? As many seasoned freelance business owners will attest to, it can be difficult to focus on doing the work that brings income in, while also doing tasks that keep your business operations in good standing from a legal and tax perspective. If you find that you are spending too much time managing your finances and taxes, or you’re Googling tax questions to no avail, it may be time to engage a tax professional.