You’re not a freelancer, you’re a Sole Proprietor
According to the IRS you’re a sole proprietor, that means you own and operate a business and as such you are accountable for all the taxes that go with it.
The good news though is that you have complete control over your income.
Take advantage of your deductions
Anything that that you use for your work can be deducted as a business expense. Here are some examples.
- Advertising
- Business cards, commercials, web marketing etc
- Insurance
- Health, life, property and business insurance.
- Other Interest
- Life, property and business insurance, you can not deduct health insurance.
- Legal and professional services
- Accounting or legal fees.
- Office Expenses
- Rent or lease of business property.
- Repairs or maintenance
- Repairs you’ve done on your office equipment, computers etc.
- Supplies
- General office supplies such as paper, binders toner etc.
- Travel
- Traveling to conferences, meetings, business trips etc.
- Meals and entertainment
- The cost of business meals, don’t overdo it though
- Utilities
- Internet, electricity, gas etc.
- Other Expenses
- Any other expenses such as custom design work, subscriptions, etc.
For freelancers working out of their home
If you’re working out of your apartment or house you can deduct a portion of those expenses.
For example, if you live in an apartment that is 3000 square feet and your office is 800 square feet then you can deduct approximately 27% (800/3000) from your expenses.
Here’s a fictional scenario.
Apartment
| Apartment Size | 3000 square feet |
|---|---|
| Office size | 800 square feet |
Expenses
| Rent | $1000 |
|---|---|
| Electricity | $120 |
| Telephone | $50 |
Deduction
| Total expenses | $1170 |
|---|---|
| Percent deductible | 27% (800/3000) |
| Total deduction | $315.90 (.27 * $1170) |
So you can deduct $315.90 each month from your apartment expenses. Pretty nice!
Calculate your net profit or loss
Calculate your net profit or loss to predict how much you will make for the entire year.
Report your income and expenses on Form 1040 Schedule C (PDF).
Calculate your Self-Employment Tax
Employment Tax = 15.3% of your net profit.
In a typical work environment your employer pays half and the other half is automatically deducted from your paycheck. As a sole proprietor however, you pay it all.
The Self-Employment Tax pays the. .
- Social Security tax
- Medicare tax
Calculate your Self-Employment tax on Form 1040 Schedule SE (PDF).
Calculate your Income Tax
Income Tax = 25% of your net profit. (sic)
You must pay an additional 25% along with your Self-Employment tax. Try to be as accurate as possible when you estimate this tax or you might end up owing money at the end of the year.
Pay Quarterly
Most people can’t pay a big chunk of money at the end of the year so try to pay every quarter (three month intervals). Plus it won’t hurt as much each time you cut a check.
Talk to an Accountant
No amount of research can replace the advice of an experienced accountant. Find a good one in your area and talk to him before you start paying taxes. Chances are he’ll help you save money in ways you’ve never even thought of.