As the way we do work and the type of work we do has changed drastically in the last few years, we’re headed toward a 50% freelance workforce. Whether you’re ready or not, the future is here and many of us need to learn how to pay taxes as a freelancer. If you haven’t figured out that you should use a CPA, now is the time.
Here are four reasons to hire a CPA to help you pay taxes as a freelancer.
1. They Teach You The Basics
When you’re becoming a freelancer, you’re taking on the task of paying taxes on your own where once your employer would handle them for you. When you hire a CPA, you’ll get a crash course in how much you’re expected to pay. If you don’t learn about what is expected of you, you could be hit over the head with a huge bill at the end of the year.
On your own, you’re going to pay for your self-employment tax, which includes social security and Medicare. For your 2018 taxes, this is going to be 6.2% of how much you made. If you had a full-time job, you’d have this taken out of your check automatically, with your employer pay an additional 6.2%.
Since you’re on your own, that entire 12.4% is on your shoulders. However, since you’re self-employed, you can deduct the “employer” share of 6.2%.
Most states have their own self-employment tax that you have to pay. Living in a city with a higher tax rate, like Chicago or New York, requires you to pay an additional rate.
With all of these rates to keep track of, a CPA could help you to ensure that you’re not saddled with debt. They’ll be able to help you predict how much you’ll have to put aside for taxes and to monitor your spending. Most of us have no idea how much to set aside, even if the money is being taken out automatically.
Since everyone’s financial situation varies, a CPA can show you a few tricks as to how you could be saving.
2. Pay Taxes Quarterly
Since your CPA has a clue as to how much it could be costing you to pay your taxes year after year, they’ll also advise you on how to stay ahead of tax bills. With their help, you’ll be able to start paying taxes based on your projected income. If you’re running a profitable business, you should pay your taxes off quarterly or else you could be subject to a penalty.
The IRS is going to want money all throughout the year, as if you were working for an employer, even if you’re self-employed. That’s why you should consider putting aside 30% of your income and sending in a small amount quarterly until you file your taxes at the end of the year.
For anyone who isn’t intimately familiar with how tax rates work, they’re going to come to this figure all wrong. You don’t want to come up with a loose and general number, since it’s a pain to get this number back and you could be subject to fines if you fall behind. You need the help of a CPA to come up with a figure that makes sense for what you do and how much you make.
Filing your taxes and finding that you’re subject to a penalty is a real punch in the gut. While working as a freelancer has a lot of benefits, finding that you owe money and a penalty is a massive undertaking for freelancers walking on the margins.
3. Explain Your Business Model
If you haven’t explained how your business works on a day to day basis, your CPA won’t be able to help you. Unless they fully understand how you get paid and how you do business, it’s going to be hard for them to give you all the deductions and credits that you deserve.
When you go to your accountant on your first meeting, tell them what a typical working day looks like. Tell them what you need to purchase to do your work and how each purchase or activity you spend money on relates to work. In a lot of cases, the meals you buy in restaurants with other professionals will be a business expense, so long as you’re entertaining a client.
However, in these cases, be aware that only half of that expense is going to qualify.
This is a different case if write restaurant reviews for a living. You could write off every meal whether you’re eating with a client or not so long as that restaurant has to do with your work. Since these things fall under the umbrella of the research you do for work, then it could be a write-off.
If your accountant doesn’t understand how you do business or what it is that you do for work, they won’t be able to help you. The more they understand, the better they can help you out.
4. Organize Your Receipts
There are more ways for you to keep track of your spending, thanks to the kinds of tools that banks and credit card companies are using. You can get invoices sent to your phone and see what you’ve spent and how you’ve spent it. You can organize your transactions by the type of business at the touch of a button.
If you’re savvy with spreadsheets, this data is able to be exported out to other tools to be used to form financial reports.
One of the reasons for digital receipts is the simple material fact that receipt ink fades after a while. More bookkeeping and accounting tools are integrating camera software to allow you to take photos and enter the information automatically.
Learning How to Pay Taxes as a Freelancer Takes Time
If you’re just learning how to pay taxes as a freelancer, it’s going to take years to perfect it. There are so many things to learn about tax law and how freelancers are impacted that you might be figuring it out for the rest of your life. That’s why a CPA is so useful!
If you’re still wondering whether to go DIY or hire someone, check out our guide for more reasons why you should hire someone.
