Have a Side Hustle? Here’s What You Need to Know for Tax Season
The freelancer pool has grown significantly since 2014, and for good reason. With technology making it easier to both find work and work remotely, more than 64 percent of freelancers found work online. Last year, there were more than 56 million people in the U.S. who either ditched the archaic nine-to-five office job or supplemented their primary income with a side hustle.
According to the fifth annual “Freelancing in America” study published in October 2018 by Upwork and Freelancers Union, the number of freelancers has grown by 3.7 million since 2014. They’re spending more time freelancing too: more than 1 billion hours per week. The average weekly hours spent freelancing increased by 72 million hours per week from 998 million in 2015.
And for many people, choosing to freelance isn’t out of necessity. In fact, 61 of freelancers said they started freelancing more by choice.
While freelancing seems to be the easiest way to bulk up your income, come tax season, it can leave many with pounding headaches — and many questions. Should I have been making quarterly payments? What forms do I receive? What can I write off?
Trust us; you’re not alone.
But before we really dig in, let’s start with the good news.
What’s new this year?
This year, with lower tax rates, 80 percent of individuals should pay less tax in 2018, Andrew Lafond, licensed certified public accountant and associate professor of accounting at La Salle University, tells SheKnows.
Stacy Caprio, search-marketing manager at TimePayment Corp. and founder of Her.CEO, tells SheKnows the new tax rules will benefit freelancers, “mostly because of the new deduction that allows them to keep more of their earnings.”
We spoke to several finance experts, who gave us the lowdown on what you need to know, both as you file and steps to take following filing, should you choose to continue freelancing.
Did you make quarterly payments?
If you know you’ll owe $1,000 or more in federal taxes for the year, you are generally expected to make estimated tax payments throughout the year (much like you would with a typical nine-to-five). If you don’t, you may owe an estimated tax penalty. You’re also welcome to make monthly payments. In 2018, estimated tax payments were due April 18, June 15, Sept. 17 and Jan. 15, 2019.
“The IRS provides worksheets to help contractors determine estimated tax payments,” Charlie Corsello, president of TaxDebtHelp, tells SheKnows.
If you didn’t make these payments, don’t fret; you can still file, but you could pay penalties. That said, it’s recommended you make these payments in 2019. The due dates in 2019 are April 15, June 17, Sept. 16 and Jan. 15, 2019.
“Taxes aren’t automatically deducted from your freelance income, which could mean you owe a ton at the end of the year — and that could mean penalties too,” Rebecca Liebman, CEO of LearnLux, tells SheKnows. “Plan to pay quarterly — you can set this up with the IRS — so there are no surprises next time around.”
Before you file
If you made at least $600 from any of your clients in 2018, you should have received a 1099 form by now, as they were due from the client to their respective freelancers and/or contractors by Jan. 31, 2019. If you were paid through a site like PayPal or UpWork or another online payment service, you may receive a 1099-K form reflecting that income, Liebman says.
Now, gather all your expenses, because freelancers can now deduct up to $1 million of business-related expenses.
What you deduct depends on what you do as a freelancer. If you write full-time, you might want to gather your internet bills, phone bills and/or the receipt for the brand-new laptop you might’ve purchased. If your freelance gig requires driving, then gather all your auto expenses and mileage for the year. As for traveling, 100 percent of travel expenses related to the business activities are deductible. The moving expense deduction has been eliminated, however.
“Consider consulting with a tax professional about these expenses, and be careful of pitfalls,” Krystal Pino, CPA and founder of Nomad Tax, tells SheKnows. “For example, you can claim mileage or auto expenses, but not both.”
If you’re struggling to gather your business-related expenses, it’s highly recommended you use cloud-based accounting software like QuickBooks.
“Software, like QuickBooks, for example, can connect to a business bank account and pull transactions in for you,” Chad Rixse, founder of Far North Capital LLC, tells SheKnows. “They also have a corresponding mobile app to take photos of receipts and attach them to transactions for even simpler record-keeping.”
Joy Liu of Financial Gym tells SheKnows she suggests isolating all your business expenses to one separate account so you don’t have to sort through personal expenses.
“Set up a separate bank account and credit card for business,” Corsello says. “By doing this, it makes it way easier for a freelancer/contractor to prepare their tax return by helping them determine profit or loss. It also makes it easier for the contractor or tax professional to classify expenses as well when leveraging financial software. Moreover, it helps greatly with determining estimated tax payments and/or if a contractor is audited.”
And most important: “Keep your actual receipts or take a picture of them,” she says.
If all this is already confusing and overwhelming, don’t worry; you can always talk to a tax professional about it, even if it’s just a brief meeting.
“Seeing a tax pro can help make sure you’re filing everything correctly and maximizing your deductions,” Liebman says. “It’s a win-win.”
When it’s finally time to file — and you’ve prepared for this moment correctly — this should, in theory, be the easiest part. But if you feel unprepared, your best bet is to schedule an appointment with a tax professional. Then take all the aforementioned tips to heart, and you’ll be a pro yourself come this time next year.
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