Freelancing is becoming more and more popular, whether part- or full-time. Income tax filing for freelancers or gig workers may tend to be complicated, but this doesn’t have to be the case.
Statista estimates that 59 million people performed freelance work in 2020, either as a temporary job, a side job, or a long-term career. There are certain challenges associated with freelancing, including negotiating freelance pay rates and worrying about where your next job will come from.
There is a common misconception that freelancers or gig workers don’t pay taxes. Those who have been working with a company until recently, especially new freelancers, are accustomed to their employer automatically deducting from their paychecks. As a gig worker, you are responsible for staying on top of your tax liabilities and figuring out what you owe and when you should pay it.
Independent contractors and freelancers face tax time every year, and not just once a year. So, through this blog, we will try to answer all such queries, including how to file taxes for freelancers or gig workers and how being your own boss can present some serious challenges, such as proving your income to a skeptical mortgage lender.
What Challenges Can Freelancers or Gig Workers Face While Filing Taxes?
Because freelancers aren’t sure what they can deduct, they often miss out on valuable tax deductions and benefits. According to a Xero report, 35% of freelancers have trouble understanding taxes and paying them, and 73% don’t deduct any expenses. Small business tax deductions and credits can be identified by a tax professional. They can also offer sound advice on lowering taxes.
Reporting your income incorrectly or failing to report your income can trigger red flags and get you in trouble with the IRS. You may owe back taxes if the IRS believes your income is different from what it actually is.
One of the biggest pain points for freelancers is bookkeeping. Professionals who are not accountants may not be familiar on how to do it correctly. But it’s a necessary part of working as a freelancer. Accounting and bookkeeping can be easily handled by SaaS platforms. However many are quite costly and require a lot of training. Taxes on freelancers are due quarterly, but most freelancers are not aware of this. Each year, you’ll need to write a check for your estimated taxes (which mimics tax withholding from salary workers’ paychecks). Freelancers don’t have a lot of income stability, so that can be challenging. It’s hard to predict whether a year will be a boom or a bust in January. A cash flow problem can result if you overestimate what you owe. When April 15 rolls around, you could find yourself facing a hefty bill if you underestimate.
A self-employment tax, which stands at 15.3 percent in 2022, will also be due since you don’t pay into Social Security or Medicare.
Also Know: Instant Cash Advance for Gig Workers
It All Sounds Pretty Intimidating, Doesn’t It?
Well, the good news is Beem can help you make the process as seamless as it can get. Here’s how!
With Beem, you can file your federal and state personal tax returns. No matter how many states you have worked in or how many W-2s you have. The company provides tax filing services for any filing status (single or joint) across all 50 states and for all kinds of tax forms (W-2s, 1099s, and more).
Here is How Free Tax Filing for Freelancers/gig Workers Works
Payments received from clients
You’ll receive a Form 1099-NEC from your clients, letting you know how much they paid you during the year. You’ll need these to report your gig income.
Major forms involved: 1099-NEC
It will be a bad idea to leave out information on your tax return if you receive a 1099 from someone who also sent a copy to the IRS. In addition, if a client did not send you 1099, you probably still must report the income you earned there. A person’s income, regardless of whether it’s paid in cash, is required to be reported by law unless specifically exempt.
Estimated tax payments
Currently, taxes in the United States are paid as you go. Regardless of how you earn money, the IRS wants its share as soon as possible. Employee paychecks are withheld from employers because of this reason. Because you are not an employee, you may have to make estimated tax payments in the year.
Form 1040-ES and Form W-4
The IRS may require you to estimate your tax liability every quarter. If you wait until the deadline to file, you might have to pay penalties and interest.
Step-by-Step Guide on Online Tax Filing for Gig Workers
Online tax filing for gig workers can be done using Beem’s ColumnTax. If you receive a larger refund than estimated from another tax return preparation service, ColumnTax will reimburse you up to $250.
- It must be solely due to calculations, and not due to entering any additional information or taking a different tax position, to qualify for such reimbursement.
- The other tax preparation provider must prepare your federal (and state) income tax returns for you in order to qualify. You must submit a copy of the returns within 60 days of filing, either by letter to 228 Park Ave S, PMB 22299, New York, New York, 10003, U.S. or by email to [email protected].
- Providing proof of payment for the other provider will also qualify you for reimbursement (up to $250).
- If you claim that the other tax preparation company calculated a lower tax liability or a larger refund amount, ColumnTax may request additional information to back up your claim.
Beem helps in filing taxes for freelance work irrespective of:
- What your filing status is (single/married/separated/widowed/head of household)
- Which of the 50 states in the US you are in
- Any and all tax forms (W-2, and 1099, etc.) submitted.
Things to Note While Filing Taxes for Freelance Work
Here are a few things that need to be kept in mind during online tax filing for gig workers:
- You need to pay estimated income taxes each quarter instead of just once a year if you expect to owe more than $1,000 in federal income taxes.
- Don’t forget to calculate your quarterly payments accurately to avoid paying a remaining balance when you file your annual return by April 15!
- Each quarterly payment is due on the following dates:
- The first quarterly estimated payment, and your annual tax return for the previous year, are due on April 15
- Your second estimated quarterly payment is due on June 15
- Your third estimated quarterly payment is due on September 15
- The fourth estimated payment for the quarter is due on January 15
- However, if you meet all three conditions set by the IRS, you won’t have to pay quarterly estimated taxes:
- The tax liability you owed for the previous year was zero (in other words, there was no tax to pay).
- If you are a citizen or resident of the United States (for at least a year prior to applying)
- An entire 12-month period covered your last tax year
- As income and expenses come in, self-employed individuals should spend time on tax-related information each day. By staying on top of your finances, you will avoid panicking the week before your accountant’s appointment, and your records will be more accurate.
There are many benefits and rewards to freelancing, both personally and professionally. It is nevertheless possible to face significant tax questions and challenges as a freelancer. In many cases, the answers will depend on the particular circumstances.