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    Experts Share 16 Tax Tips Every Freelancer And Side Hustler Should Know

    Psst, you might be able to write off your home office!!

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    If you got a 1099 tax form in the mail, there's a whole bunch of tax information you need to know.

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    Every company or client you work for on a freelance basis should send you a 1099-NEC tax form (formerly1099-MISC). This tax form comes with its own set of rules, so it helps to get familiar with it before you file.

    To help you out, we talked to a couple of tax experts who broke down everything you need to know about filing your 1099 into a 16 actually easy-to-understand tax tips.

    Comedy Central / Via giphy.com

    We emailed with Shahar Erez, a freelance economy expert and CEO of the freelance management platform Stoke Talent, and Kevin Loiselle, CPA and senior tax manager at the financial services firm Aprio Cloud.

    1. If your 1099 form says you made $400 or more in 2020, you have to file and pay taxes on that income.

    Screenshot of self-employed information from the IRS
    IRS / Via irs.gov

    If you made $400 or more off your side gig or freelancing work in 2020, you'll have to pay both income tax and self-employment tax (which covers your Social Security and Medicare contributions).

    2. And those taxes can be high, because when you freelance, taxes aren't taken out of your paycheck as you go.

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    When you're an employee and you receive a W2 tax form, Social Security and Medicare taxes are taken out of your paycheck resulting in lower take-home pay. But when you're self-employed or freelancing, $500 worth of work translates to a $500 paycheck — no taxes are taken out.

    But that doesn't mean you don't have to pay them. As Erez explains, "Everyone who is self-employed, including freelancers and contract workers, is legally required to pay a self-employment [tax] of 15.3% to cover Social Security and Medicare."

    In addition, you have to be ready to pay state and federal income tax on what you made, which will vary based on what tax bracket you fall in.

    3. To pay those taxes, you should put aside at least 25% of what you make freelancing.

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    To ensure you aren't strapped for cash come tax time, it's a good idea to put aside money as you go. Trust me, it can add up.

    To play it safe, Erez says, "It is recommended that freelancers put aside 25­%–30% of their freelance income and keep it in a separate savings account. With this approach, [income] and self-employment taxes should be covered and prevent a huge expense at the end of the year." He suggests opening a separate savings account where you can set up direct, automated deposits from your checking account to keep your tax savings on track.

    4. Rather than paying taxes once a year, you might need to file your taxes quarterly.

    Screenshot of estimated tax payment dates
    IRS / Via irs.gov

    In general, the IRS says you'll have to make quarterly estimated tax payments if you "expect to owe tax of $1,000 or more when their return is filed." These estimated tax payments are paid four times a year — April 15 (for January to March); June 15 (for April to May), September 15 (for June to August); and January 15 of the following year (for September to December of the tax year).

    These quarterly tax payments make it so self-employed people and freelancers can pay income tax and self-employment tax as they go. And, Loiselle notes that paying estimated taxes as a self-employed person "is recommended to avoid interest and penalties."

    5. Keep in mind that you may qualify for additional aid through a COVID tax bill.

    Screenshot of the IRS coronavirus tax relief page
    IRS / Via irs.gov

    It might pay to do a little research to see if you qualify for any added virus-related support — either as an individual or as a small, self-employed business owner.

    Loiselle explains, "There are also many different scenarios where aid has become available throughout the multiple tax bills passed throughout the past year to help mitigate the impacts of COVID. Everyone should review the numerous opportunities made available under the new legislation to see if any opportunities are applicable. We recommend you consult with your tax advisor."

    6. Unlike most regular employees, people who freelance can write off the things they have to buy to do their work.

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    When you freelance or work for yourself, you supply your own computer, notebooks, and software subscriptions, and have to pay for things like marketing, accounting, and career development yourself. But, on the flip side, all these expenses can be written off come tax time.

    "Some of the most [common] expenses that freelancers can write off for taxes include anything related to travel, like their car or public transit expenses. Costs related to the upkeep of a home office can also be written off, such as supplies/equipment expenses — both hardware and software — and business expenses, like legal, accounting, insurance, licenses and marketing costs. Other costs that freelancers can write off are education, including courses, conferences and seminars, as well as transaction fees through companies like PayPal or Payoneer," said Erez.

    7. These write-offs or expenses are often called itemized deductions, and you'll want to track them carefully. That being said, in the end, it may make more sense to choose the standard deduction instead.

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    Okay, okay, I know I need to break this one down. Erez confirms that, "Yes, I always recommend keeping track of your expenses with itemized deductions. You never know how the year will end, so it’s always best to be overly prepared and prevent a last-minute scramble."

    But, truth be told, after a year of carefully tracking every expense, the total cost of your expenses (or itemized deductions) may be lower than the standard deduction you qualify for. For this year, the standard deduction is $12,400 for single filers and married people filing separately; $24,800 for married people filing jointly; and $18,650 for head of household. That means, if you're a single filer and your total itemized deductions are less than $12,400, you'll want to take the standard deduction instead.

    8. Remember that 15.3% self-employment tax we talked about? You can write off part of that, too.

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    Erez says one thing most freelancers don't realize is that "just like employers, they can write off half of their Social Security and Medicare taxes," also known as self-employment tax.

    9. And, if you pay for your own health insurance, you can write off your premium payments.

    Screenshot of a health insurance premium bill
    Anthem

    If you aren't eligible to participate in an employer-subsidized health plan, chances are you have to pay for healthcare on your own, which can be pricey. You can actually deduct your premiums for health, dental, and some other forms of insurance.

    10. If you work from home, you may be able to deduct your home office.

    Spyglass Entertainment / Via giphy.com

    To qualify for the home office deduction, your home office must be your principal place of work and you must use it regularly and exclusively as a home office.
    "The best way to break it down is this: if you submit a 1099, you do not report to an external office, you report working from home at least weekly, and you have a dedicated workstation, then you are eligible. The idea of a dedicated work station can get tricky, but even a desk can count as a workstation," explained Erez.

    11. There are two ways to write off your home office — and one is noticeably easier.

    Screenshot of home office deduction options
    IRS / Via irs.gov

    Erez explains that "the deduction you get is calculated based on a percentage of your workstation out of your home. From there, you can deduce the relevant percentage from your rent, insurance, utilities, home essentials and repairs, cleaning, communication needs like WiFi and phone lines, property taxes, and home depreciation."

    If that sounds extremely complicated, don't worry. Erez says, "Freelancers can use the 'simplified' deduction of $5 per square foot." Phew.

    12. You might also be able to take a 20% qualified business income deduction.

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    Freelancers and self-employed people may be eligible for a qualified business income deduction, which allows you to deduct up to 20% of your qualified business income.

    Keep in mind that Loiselle says this deduction is "subject to limitations based on taxpayer income levels, the type of business they operate, the amount of wages paid by the business, and the amount of assets the business has."

    13. If you pay for work expenses regularly, you might want to have a separate credit card just for freelancing.

    Screenshot of some business credit card options
    Nerdwallet / Via nerdwallet.com

    Trust me, I'm all about not opening a new credit card, but in this case, it totally makes sense.

    Erez explains that opening a work credit card "helps keeps all work expenses clearly separated from personal expenses, which can be of great help for tax purposes." He said that this is especially true for part-time freelancers or people with a side hustle because when you're just freelancing on the side it's all too easy to put work expenses on your personal card.

    14. To avoid being audited, make sure your 1099s are correct and carefully review everything before you hit submit.

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    Taxes are not something you should rush. Start early and take your time because Erez says that where most people mess up is on the little stuff.

    "Any discrepancies you have in your 1099 will get you flagged and audited," he said, explaining that "the most common mistakes that freelancers make when preparing and filing taxes are submitting their 1099s late or with inaccuracies, missing out on credits and deductions, and not having attention to detail. Typos or missing signatures can make a difference, so it can be good to take a step back and review your documents before filing to make sure you didn’t miss anything."

    15. And, be honest about your expenses and deductions.

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    This should go without saying, but Loiselle notes that "If you collect payments electronically it is possible that you will be issued a 1099-K, which will report your revenues to the IRS. Trying to claim imaginary expenses to lower the amount of taxes owed may be easy for IRS computerized systems to spot through statistical analysis. Numbers jumping out as being too unreasonable is typically a way that can land a freelancer into an IRS audit."

    In short, be honest.

    16. Finally, you might want to pay someone to do your taxes — especially if it's your first year freelancing.

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    Of course, hiring an accountant is just another expense, but if you're new to freelancing or think your taxes might be complicated, it may be worth it to use a service like H&R Block to get help from a pro.

    "I always recommend that freelancers hire an accountant to help with their taxes. Especially for people who have just transitioned from full-time to freelance, the tax process can feel overwhelming due to its many new complexities. Penalties are high if taxes aren’t filed correctly, so it’s best to invest in the support from an accountant upfront rather than paying fines later on," said Erez.

    Experienced freelancers, speak up! What expert tips have you learned along the way?

    And for more money tips and tricks, check out our other personal finance posts.

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