As a freelancer or small business owner, are you struggling to understand how to pay your taxes? It can be an overwhelming process and confusing at times. However, with these five tips, we will provide information on what steps need to be taken for entrepreneurs like yourself who have become self-employed recently (or not) to know their options when it’s time to file income tax returns each year.
#1: Get Organized and Save Time
The first step is to get organized. You will need to gather all the necessary information to file your taxes. The more prepared you are, the less time it will take you to come tax season! If you are using an accountant or a professional CPA or tax firm, ask them for any helpful filing tips they may have that would be beneficial to you.
Either way, to file taxes as a freelancer, you will need:
- Your social security number
- An Employer Identification Number (if you have employees)
- The name and contact information of your tax preparer or accountant
- Register for an account at irs.gov and set up an online account so that the IRS has secure access to your tax information (more on this below).
#2: Know the Different Types of Tax Payments
If you are a freelancer, self-employed individual, or small business owner—you will need to file both estimated and quarterly taxes. Understanding the difference between these two types of payments is essential to filing your taxes.
Estimated taxes are used to pay tax on income that is not subject to withholding. In other words, if you had any freelance or self-employed income during the previous year that an employer did not withhold—you will need to make estimated tax payments four times a year. These payments can be made electronically by using Form 1040-ES.
Quarterly Tax Payments
This is a method used to pay federal income tax on self-employment earnings or income withheld from your paychecks. Small business owners who have employees will need to make quarterly payments. Still, this payment type does not apply to freelancers and self-employed individuals who do not make quarterly estimated tax payments.
#3: Avoid IRS Penalties
Failing to pay taxes is a penalty in itself. When paying taxes for small business owners or freelancers, avoiding tax penalties is essential to avoid trouble with the IRS. One standard tax penalty that freelancers and small business owners should know is the failure to file a penalty. This typically occurs when you do not file your taxes, even though you must.
In addition to avoiding this penalty by filing your taxes each year, you can also prevent it by submitting your estimated tax payments throughout the year. These tax payments help to ensure that you don’t end up owing the IRS a considerable sum of money when tax time comes around.
#4: Stay Up to Date with Tax Law Changes
In addition to avoiding common mistakes, freelancers and small business owners need to stay up-to-date with recent changes in tax law. This will help ensure that you pay the right amount of taxes throughout the year. For example, one standard change is the tax rate of self-employed individuals. As this typically changes each year, it’s essential to stay informed on any new rates that have been set by Congress or your state government.
Other changes can affect your taxes as well, such as having to pay the additional Medicare tax due to the Affordable Care Act or whether you choose to itemize or take the standard deduction.
#5: Hire an Accountant
Finally, if you feel unsure about how to pay your taxes as a freelancer or small business owner, you may want to consider hiring the help of an accountant. While many people think that accountants are only for big businesses, this is not true! An accountant can be beneficial when it comes time to do your taxes by providing valuable insight and reducing the risk of mistakes.
Plus, having an expert on your team who knows the ins and outs of tax law can make the process much less stressful. The more you know about avoiding common mistakes, the better prepared you are to handle filing your taxes.
Freelancers, self-employed individuals, and small business owners have a lot on their plates when it comes time to do their taxes. However, if they follow these tips and use the advice of experts, it can make the process much more manageable.
Knowing how to pay taxes for freelancers and small business owners is tricky. But with the proper education and preparation, you can avoid penalties while also saving money. If you follow these five tips on how to pay your taxes as a freelancer or small business owner, you should be well on your way to success.