This is my ninth year of full-time freelance writing, which I’d like to say makes me an expert at freelance taxes.
However, the truth is that I learn something new every year — whether it’s how much to set aside for estimated taxes, what accounting software I should be using or what percentage of my internet bill counts as a business expense.
I will give you this tip, as someone who’s been in the freelance tax-paying game for a while: the best thing you can do as a freelancer is get a CPA, and the second-best thing you can do is ask your CPA questions. Trust me on this one.
Asking the right questions can save you a lot of time and prevent you from getting stuck with an unexpected tax bill in April.
So let’s dive in. First, we’ll look at what questions to ask your accountant before tax time, then we’ll look at what estimated taxes are and how to pay estimated taxes, then we’ll look at other frequently asked questions, aka FAQs for freelancer taxes.
Ask these questions to your accountant before tax time
Here are some of the questions I wish I’d asked my CPA when I first started doing freelance taxes, as well as a few items I wouldn’t have known about unless my CPA had told me.
Remember that I’m not an accountant, so if you want real tax advice, you need to ask your own CPA these same questions:
1. Is there a preferred accounting software you’d like me to use?
When I started freelancing, I did all of my accounting on a handmade spreadsheet, assisted by a few Gmail folders labeled “tax deductions,” a box of paper receipts and my bank statements. Last year, I got a new CPA who suggested I switch to a standard accounting software. This would make her life easier, as she wouldn’t have to decipher my spreadsheets — which make perfect sense to me — and she thought it might make my life easier as well.
Turns out she was right.
If you aren’t already using a freelance accounting software, it’s worth it to try one. The Write Life recommends FreshBooks and Harvest, but you should also ask your CPA if they have a preferred accounting software.
2. What can — and can’t — I do in my home office?
I used to freelance in a studio apartment, and my CPA told me that, since I used the same small table for writing, eating, and watching TV shows on my laptop, it didn’t count as a home office.
To claim the home office deduction, he explained, I had to have a space reserved only for work.
When I moved into a larger apartment, I had enough space to reserve a corner for a home office.
If you want to claim the home office deduction, talk to your CPA about what you can and can’t do in that space to make sure it qualifies.
3. Is my laptop or phone a depreciating asset?
Your CPA may ask you about depreciating assets, which are physical items that lose value over time.
You’re allowed to deduct a portion of this asset’s cost over the life of the asset, which is the kind of statement that is complicated enough that you should really leave it to your CPA.
But you should also ask your CPA if your laptop is a depreciating asset. If you use your smartphone for business, or if you have cameras or microphones for vlogging or podcasting, ask about those too.
Any technology that you use for work and regularly replace might count as a depreciating asset, and get you one more tax deduction.
4. What percentage of my phone and internet bills can I deduct?
If you use your home internet for business — and what freelancer doesn’t? — you are entitled to deduct a percentage of your internet bill on your taxes. Same goes for your smartphone bill.
Depending on what your CPA thinks of your home office, you may also be able to deduct some of your utilities. Ask. Don’t assume your CPA will bring it up.
5. Do I need a business license?
Sometimes paying federal and state taxes aren’t enough. Depending on your business, you may need a business license, which comes with business taxes. You may also need to pay city taxes as well.
So ask your CPA whether you need a business license. Don’t just go to your state’s licensing page, search the licenses, and assume that you’re okay because you don’t see a license option for “freelance writer.”
I pay business taxes to the State of Washington under the category “Service and Other Activities; Gambling Contests of Chance (less than $50,000 a year).” That’s why you need to ask a professional about these kinds of things.
6. What deductions should I track?
Freelancers are often entitled to more deductions than we realize, and we deserve to claim all of them. If you go to a writers’ conference, for example, you will probably be able to deduct the cost of the conference, the cost of the travel, and a percentage of your meals.
But you won’t know what you can deduct until you ask. Research materials? Postage? That time you asked another freelancer for an informational interview and paid for the coffee? What about the Lyft you took to interview a source? Or the mileage, if you drove your own car?
There are lots of potential freelance deductions out there, so it’s important to track your expenses, even the small ones, and ask your CPA which of these expenses you should deduct.
Don’t forget to ask which deductions you might overlook, or which deductions you should track for next year’s taxes, like the cost of that accounting software you just bought!
Estimated Quarterly Taxes – The What, Why, and How
We all know to file an individual tax return by April every year.
But did you know that as a business owner, you’re expected to file estimated payments every quarter, as well?
It’s true. Once you expect to owe the federal government at least $1,000 in taxes each year, you are expected to file quarterly taxes throughout the year.
Why? Because the government doesn’t want to wait until April to get a cut of what you earn. It wants you to pay as you go, just like if you were an employee at a company that withheld taxes from your paycheck and paid them consistently on your behalf.
Paying quarterly estimated taxes isn’t optional; if you fail to pay up throughout the year, the government could penalize you with interest when you file your tax return for not paying enough tax.
Filing quarterly is old hat for me now, but I remember how I felt about this when I first launched my own business. I wondered how the heck new business owners were supposed to know about this! No fairy Godmother shows up at your door and says, I see you’re self-employed! Let me walk you through your tax requirements.
I was fortunate to have my accountant dad, who co-authored The Money Guide for Freelance Writers, to educate me. Here’s what he taught me.
Why you have to pay estimated quarterly taxes
Knowing you’re supposed to do something often isn’t enough for smart business owners. We want to know why we’re supposed to do it. Plus, understanding the logic behind this can make it easier to follow through.
So here’s why quarterly tax payments exist. One of the perks of working for someone else’s company is they pay taxes on behalf of the employee throughout the year. Each time that employee gets a paycheck, the company withholds Social Security, Medicare and income taxes, which means that money’s gone before the employee even opens the paycheck.
As a result, employees sometimes forget they’re paying taxes throughout the year. Even if you know those taxes come out of your paycheck, it’s not something you think much about until you file your annual tax return and figure out whether you have to pay more or receive a welcome refund.
Here’s the difference when you’re self-employed: no company pays those taxes on your behalf. It’s up to you to make the payments. And when you do so every few months, it might feel like a kick in the gut.
The reason it hurts so much is because taxes eat up a significant portion of your income. Most freelancers who encounter this for the first time think they earned decent take-home pay during the quarter, only to realize they have to pay a big chunk of those earnings to their federal and state governments.
Instead of getting frustrated with taxes, let’s focus on helping you understand when and how to pay them, so you can get back to the fun parts of running a business.
When are estimated taxes due?
This tends to be one of the biggest questions around quarterly taxes: when are estimated taxes due?
You’re required to file them on the same schedule each year. (Unless, of course, the government delays these deadlines because of a pandemic or some other widespread disaster, like it did in 2020.)
Here’s the schedule for filing estimated payments:
- By April 15: to cover earnings from Jan. 1 – March 31 (Q1)
- By June 15: to cover earnings from April 1 – May 31 (Q2)
- By Sep. 15: to cover earnings from June 1 – Aug. 31 (Q3)
- By Jan. 15: to cover earnings from Sep. 1 – Dec. 31 (Q4)
The schedule can be confusing because payments aren’t due exactly three months apart. They’re called “quarterly payments,” but, as you can see, they don’t all cover a three-month period.
Still, because of how these “quarters” are spread out, it’s OK to think of each payment as covering three months’ worth of tax, if that’s easier to wrap your head around.
In the middle of this schedule, you’ll also have another big deadline: tax day on April 15.
If you’ve filed a tax return previously that includes self-employed income and used a tax software like TurboTax, that software will likely provide you with estimated tax payment forms. It might even tell you how much to pay quarterly, basing those estimates on what you earned the previous year.
What should I do about estimated taxes if my income increases?
This is the one question I wish I had asked sooner.
The first CPA I worked with looked at my yearly income and gave me a set of estimated tax vouchers to use on the following year’s quarterly estimated taxes. I got four completed estimated tax forms, each with an amount of money that I was supposed to pay. All I had to do was write the checks and drop the estimated tax vouchers in the mail on their respective due dates (or pay online).
However, I increased my freelance income significantly from the previous year to the next. I didn’t realize that meant I was paying significantly less in estimated taxes than I should have been paying.
My CPA and I discovered that, thanks to my increased income, I owed the IRS an additional $5,443.
If your CPA gives you estimated tax vouchers, ask what you should do if your income increases.
In my case, I started putting aside a percentage of my income to go towards estimated taxes, instead of paying a fixed number on a voucher.
How to pay estimated taxes
Let’s assume this is your first year as a freelancer and you need to seek out quarterly payment forms for the first time. You can pay online; this IRS website lays out your options.
You can also pay via check after downloading this form online: Form 1040-ES.
While I do almost all my filings online these days, I still pay estimated payments via check, because I have a system that works for me. I keep paper forms for estimated payments in a folder in my office, so once it’s time to pay, I don’t have to search around online to find the right forms and addresses for where to send them. All my paperwork is waiting right in that folder, and I can easily write a check and drop it in the mailbox.
Worried you’ll forget to pay estimated taxes? I add reminders for all of these dates on my Google Calendar when I file my tax return each year, so I know I’ll see the reminder throughout the year.
How much estimated tax should you pay?
How much tax you pay depends on your tax bracket and a host of other factors, including how much you can claim in deductions. This can make it difficult to figure out how much estimated tax you should pay.
But here’s the good news: Estimated tax payments are simply estimates. They’re not expected to be perfect. They just have to be close enough.
Your goal — and what the IRS requires — is to pay either 100% of the estimated tax that would be due according to your previous year’s tax return, or 90% of what you actually owe this year.
To make this simple for you, I wish I could say, “put aside 30% of your business profit each quarter to pay estimated taxes.”
But you might pay more, or you might pay less. Here are three ways to figure out how big a check to write each quarter.
1. Ask your accountant
If you work with an accountant, you can ask them to help you figure out how much to pay in estimated tax. They’ll walk you through it so the outcome is based on your specific situation.
For most of us, this is the best way to get an accurate figure.
2. Use last year’s tax return as a guide
Look at your tax return from last year. If you expect your income to be similar this year, figure out your effective tax rate.
Since your effective tax rate isn’t listed on your tax return, here’s a simple way to calculate it: divide the total tax you paid last year by your adjusted gross income.
Then use your effective tax rate to calculate your estimated taxes: multiply your effective tax rate by this quarter’s profit.
This isn’t a perfect method, but it should get you close enough.
3. Rely on IRS forms
Another option is to use the worksheet on IRS Form 1040-ES to figure out how much you owe.
Spoiler alert: this isn’t easy! Even IRS worksheets that are meant to make our lives easier tend to be incredibly complicated.
Paying estimated quarterly state and local taxes
Yes, you have to pay state income tax in addition to federal income tax. Unless you live in a state with no income tax.
State income tax varies considerably depending on where you live, starting at zero in nine states. In West Virginia, where I live, it’s about 6.5%. In California it’s more than 13%.
Whether your state collects income tax and how aggressively has a big effect on how much you need to put aside for taxes. The same goes for local taxes. If you live in California, which has high state tax, or New York City, which has high local tax, you might find yourself having to put aside 35% to 40% of your income for tax. If you live in Texas, which does not collect income tax, you might fall on the lower end of the spectrum, putting aside 25% or less of your income.
If your ears perked up when I said “no income tax,” here’s a list of nine states where that dream is reality: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. New Hampshire and Tennessee also don’t tax wages, but they do tax investment income and dividends.
Some people who have flexibility over location move to states with no income tax to keep more money in their pocket. It adds up over time!
To figure out how to file estimated state tax where you live, simply google “[your state] estimated tax payments.” That should return forms and instructions, including an option to pay online through your state’s department of tax or revenue site; avoid third-party sites that charge you for filing.
Instructions vary by state, but pay your state estimated taxes on the same schedule as your federal payments. Local tax deadlines are usually different than federal and state deadlines.
Strategies for covering estimated tax
Just because you only have to pay these taxes four times each year doesn’t mean you should wait until then to think about them. In fact, if you make that mistake, you might not have enough money in the bank to cover your estimated payments.
That’s why many freelancers squirrel away money for taxes each month. Some freelancers leave that money sitting in their checking account until it’s time to pay up, while others open a separate bank account to collect money that will eventually go toward taxes, to keep them from spending it.
Freelance writer Nicole Dieker, for example, wrote about how she stashes away 20% of her income each month. Why only 20%? Because at the time of writing that post, she lived in Washington State, which does not have state income tax. This is why it’s so important to know your state’s laws and work them into your financial strategy.
Financial writer Carrie Smith at one point made a regular transfer of 15% to 20% of her earnings into a separate savings account. She even nicknamed the account “Income Taxes.”
“The hard part is vowing not to touch it,” Carrie wrote on her blog. “But if you can stick with it, the next time you have to pay your tax bill, you’ll be glad you put this strategy into practice.”
Putting money aside for estimated taxes, rather than hoping you’ll have enough when it’s time to pay them, is one smart way to decrease your stress while working for yourself.
FAQs and Mistakes to Avoid
- How do I avoid being audited by the IRS as a freelancer and small business owner?
The absolute best way to avoid an IRS audit (or to survive one if you do get audited) is to be honest. If you keep good records and report your income and expenses properly, you have nothing to worry about!
Again, we highly recommend hiring a reputable CPA, who does tax returns for a living. They’ve studied tax laws, they know the forms, and they’ve taken the tests to become certified. They’ll know the ins and outs and make sure things are done right. At the very least, use good software like FreshBooks, GetHarvest, Quickbooks, or Turbo Tax.
- What are the most common tax return mistakes and red flags?
Check your tax return for these 10 IRS red flags:
- Failure to report all income
- Filing a loss consistently
- Taking the wrong business deductions
- Too-neat of numbers (rounding everything to hundreds and thousands)
- Incorrectly using the home office deduction
- Overstating business entertainment and meal costs
- Independent contractor vs. employee classifications
- Misclassifying other income if you have multiple jobs
- Very low income, aka claiming the earned income tax credit (EITC)
- Mathematical errors
If you’re afraid of filing your taxes because of all these potential red flags, don’t be. Only about two percent of Americans are audited each year, and most of them have committed serious tax errors or are clearly trying to claim excessive, irrelevant deductions.
As long as you keep good records, take only deductions for which you legitimately qualify, and are careful not to make a mistake, you’ll be good to go.
Conclusion
Getting a good CPA is the first step towards running your freelance business effectively.
Asking the right questions — especially around tax time — is the second one.
Do both, and you’ll probably find that your freelance taxes get easier every year.
What questions do you wish you’d asked when you started doing freelance taxes?
Pieces of this article are excerpts from The Money Guide for Freelance Writers: How to Manage (And Feel Good About) Your Finances.
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This is an updated version of a story that was previously published. We update our posts as often as possible to ensure they’re useful for our readers.