Disclaimer: The information contained in this article is general legal information only. Consult your attorney and accountant for all specific considerations.
Taxes are a necessary evil for all people, but knowledge is definitely power when it comes to understanding how your business decisions affect your earning potential as a solopreneur, artist, or freelancer.
Knowing how to properly file your taxes is an important starting point, and doing so before the deadline so as to avoid penalties, but you’ll also want to learn how to maximize your savings as well. Smart moves mean less time and money spent on mistakes, and also less headaches and more financial freedom in the years to come.
The Internal Revenue Service (or, IRS) is the entity that keeps track of the money you make as someone who is self-employed, and they do so through the filings of Form 1099, which is legally required to be issued to you from any of your clients. You’ll want to make sure you gather and properly report all of your sources of income from the current taxable year.
Thus, it’s best to keep good records of things year-round so that everything will be organized when you need to access this info to file for yourself or hand over to an accountant or third party. As someone that is working for themselves, you’ll also want to remember that you are responsible for paying the self-employment tax rate of 15.3% (in addition to your regular income tax), which covers the Social Security and Medicare taxes that regular employees have deducted from their paychecks automatically.
This amount also includes the employer portion of those taxes, since you’re technically considered both an employee and employer when you are your own boss.
Obviously, we all would like to take home as much money as possible and pay less in taxes each year, so it’s super important to understand what deductions you are eligible for and how to maximize them. This is a big benefit of working for yourself that employees do not get. This is because you have more expenses than a typical employee associated with the running of your business operations. Ordinary and necessary qualified expenses include things like write-offs for a portion of your rent, your studio costs, utilities, travel expenses, meals, equipment, supplies, educational costs, and even “entertainment” costs like seeing shows and buying records!
As a person working for yourself, you are also responsible for paying estimated taxes throughout the year. (Otherwise, you’ll be at risk of owing one giant lump sum at tax time, and may end up unprepared with proper cash on hand to pay it.)
The best way to handle this is to set aside the money you’ll need to cover your income taxes, Social Security, and Medicare taxes every time you get paid. You can either physically transfer this money to a separate account in preparation, or keep diligent bookkeeping or spreadsheets to stay on top of it.
According to the IRS, your four estimated tax instalments are to be filed as follows:
Income Period & Estimated Tax Due
- Income Period: January 1 – March 31. Estimated Taxes Due: April 15
- April 1 – May 31: June 15
- June 1 – Aug 31: September 15
- Sept 1 – Dec 31: January 15 of the following year
And finally, you’ll want to determine how, or shall I say whom, you’ll want to handle your taxes — and ideally in advance!
Let’s face it, this stuff gets complicated and Uncle Sam does not make it easy! There are lots of forms and numbers involved, so it’s best to determine whether you are equipped to go it alone, or with the help of a digital service (like TurboTax or H&R Block), a representative from your bank, or a professional tax accountant for hire that can handle it all for you.
When I personally started working for myself, I did as much as a could until the tipping point was reached, and then I knew finding someone else to help me tackle my bookkeeping and taxes was a necessity. I enjoyed working with someone local to me that I could meet with to discuss the details of my work in person, who also understood my business and could help set me up for financial success with my taxes and beyond.
This did come with some monthly and annual costs, but I found that they were far worth it with the savings they helped me earn because they knew what they were doing. And good accountants will even be able to help you get started with setting up your own retirement plan and other smart moves for your financial future… Things we should all make a priority when being a solopreneur, artist, or freelancer!
That said, eventually if you get a good enough hold on this stuff, or it’s not that complicated in your case to begin with, the tax software available out there is really, really good. Good luck out there!
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