Freelancers have more to consider when it comes to accounting than the average employee. Here’s how to keep your business and personal expenses separate as a freelancer. For many people with full-time jobs, filing taxes requires little more than submitting W-2s, since full-time employers deduct taxes from paychecks. Freelancers, on the other hand, have no money withheld from their payments, and this lack of withholding is a huge reason why, when you’re a freelancer, accounting involves so many moving pieces that can be tough to understand and track. For starters, as a freelancer, you’ll need to properly organize personal and business expenses so you don’t confuse one with the other. Additionally, you’ll pay quarterly taxes to make up for the lack of money withheld from your payments. And if you’re new to freelancing, or you experience a large shift in your annual freelance income, you’ll also pay one large lump sum of taxes on or around Tax Day. If this all seems overwhelming, rest assured that many technologies exist to make accounting easie r for you. If you master the basics of freelancer accounting before using these technologies, you should have minimal issues when it comes time to file your taxes. Freelancer accounting basics As a freelancer, chances are that none of your clients are withholding tax money from your paychecks. Therefore, you’ll need to track all money your clients pay you so that, come tax time, you don’t accidentally underpay your self-employment tax. This tax includes federal income tax and your contributions to Social Security and Medicare, all of which full-time employers automatically withhold from their employees. Although your clients won’t withhold money from their payments to you, they’re still legally required to report the amount they pay you to the IRS. To make sure they can properly do so, you’ll need to file your Form W-9 with each of your clients. This form shares your Social Security number or Taxpayer Identification Number with your clients so they can successfully inform the IRS of their payments to you. Unlike a Form W-4 that you’d file with a full-time employer, a Form W-9 signifies that you’re a freelancer working as a separate business, not a full-time employee. Any clients who pay you $600 or more during a calendar year will use your Form W-9 and income information to issue you a Form 1099-MISC or 1099-K. (You’ll only receive the latter if you take payments by credit card.) Your clients will also file these forms with the IRS to show how much they’ve paid you, so it’s crucial that you include all 1099 forms with your tax return. Perhaps more importantly, you’ll still need to report all of your non-1099 income on your tax return. Your income comprises all the money that you earn, not just money that your clients report to the IRS. For example, if one of your clients pays you less than $600 during a calendar year, you still need to include this amount in your yearly […]
