The tax man cometh and he wants your money. Seeing that you’re a freelancer, he sees an opportunity to take a little bit more.
When you’re a freelancer, paying taxes can seem like a huge burden. There’s more paperwork to handle, calculations to make, and money on the line. If you don’t wade through the ocean of tax rules carefully, your filing could end up being a tidal wave of epic proportions.
But we won’t let that happen. Taxes don’t have to be as intimidating as they seem. As long as you aren’t hiding your money or using it to fund any crimes, well, you don’t have much to worry about.
With two weeks until last year’s taxes are due, it’s a good time to cover techniques to maximize your return (or minimize what you owe) so that you can focus on your career, not your checkbook.
So starting today, and each day this week, I am going to cover filing taxes as a freelancer.
Topics will include:
- What to expect when filing
- Getting started and preparing to file
- Common mistakes and potential pitfalls
- Itemized deductions you should take advantage of
- How to put yourself in a better position for next year’s taxes
It’s easy to forget that there are two sides to the film industry: the creative side and the business side. Everyone loves to talk about the creative side and learn more about it. It’s the whole reason you wanted to become a filmmaker, right?
But the business side is equally important, especially when you want to establish filmmaking as a significant part of your life. That’s why this topic, though not the most exciting, could make the difference when you’re trying to survive those rough patches without work and come out unscathed.
So without further adieu, let’s get started on this week-long series of freelance taxes…
10 Things to Expect When Filing Your Taxes as Freelancer
Though I’ve been working since I was 15-years-old, it wasn’t until after college that I began filing my own taxes. I was surprised at how much I simply didn’t know about taxes. Paying taxes is one of those “adult” things that you never seem to learn until you are included in that group of “adults.”
So before we get down and dirty with how to file your taxes, I want you to know what to expect out of the process and provide a base-level of understanding of what filing your taxes will mean for you.
1. You’ll Most Likely Owe Money
As a freelancer, the tax code is more cumbersome than as a waged or salaried employee. Double it if you are working freelance and working part-time, as I have done before.
The way most employees of waged and salaried jobs pay taxes is by witholding a certain amount of money per paycheck to give to the government. These witholdings are estimated based on the expected amount of hours you’ll work, though they usually skew on the high end. This is why most people end up with a tax return — because the amount of money withheld from their paychecks throughout the year ends up being more than what they actually owe.
For freelancers, most of the time you work for a production as a sub-contractor. You’ve probably filled out a W-9 form that gave the production your tax information with the understanding they weren’t going to withhold any taxes.
If you didn’t know that before, well, now you know why your paychecks from film gigs were always a bit juicier than the one from the grocery store you worked at in high school.
This was the biggest revelation for me when I started doing my taxes. Though it makes perfect sense when someone explained it to me, nobody had ever explained it to me.
That’s why I’m explaining it to you now.
Just be prepared that because you aren’t having money taken out of each paycheck you received, you’re most likely not going to receive a tax return, but in fact owe money to the government
2. You’re going to have to pay self-employment tax
As a sub-contractor and freelancer, you’re technically self-employed. Even if you worked for 3-months on the same production, you’re still self-employed. The production, as its own company, has sub-contracted out you, as your own company, to do certain work for them.
That’s why you’re going to have to pay what is called a self-employment tax.
If we go back to our friends the “waged and salaried employees,” they also pay medicare and social security taxes on each paycheck as well as whatever is withheld for income tax. The rate for this is 15.3%, but here’s the rub: half of that is paid by the employee while the other half is paid by their employer, the business.
Since, as a self-employed freelancer, you are both the employee and the employer (you employ yourself), you have to pay the full share of that 15.3%. So while your friend Bob who works at Google pays approximately 7.6% to medicare and social security, you’re paying 15.3%. Google is paying the second half of Bob’s share on his behalf.
Is it fair? Maybe. Maybe not. That’s more politics than I’d like to get into.
But it is surprising if you’ve never heard of it before. And the end game is that you’re going to pay more money than your friends with a steady job.
3. You may be charged an underpayment penalty
Income tax is a continual tax which means that it has to be paid throughout the year. The federal government expects you to pay a certain amount of estimated taxes by the end of designated payment periods split into quarters.
Have you not been paying estimated taxes by those dates? Then you might be charged an underpayment penalty.
See, our friends who work on wages and salaries are constantly paying income taxes via their withholding. That means by the time those dates roll around, they’ve already paid the appropriate amount of their income tax.
But for you, the freelancer, you may not have known you were supposed to do that. You, like me, may have thought you simply file taxes once a year like everyone else.
Well, that’s just not the case. You have to pay “estimated taxes” by those pre-determined dates and, if you don’t, you’ll owe what’s called an “underpayment penalty.”
We’ll go over this more later this week when we talk about tax pitfalls.
4. You qualify for more deductions than the average person
By now you may be thinking that it sucks to be a freelancer compared to those people working on salary who have accounting departments to take care of all this tax stuff for them.
But here’s the advantage for you as a freelancer: you qualify for way more deductions than the average person. Like, a lot more. Why?
Because the government has decided you’re your own business, so you get to deduct items like a business. This could include your cell phone, your website, your toolkit, and possibly even your Netflix account — all because they are necessary costs for your “business,” aka you!
As we talk more about filing, deductions will play a large role in helping you save money.
5. You’re more likely to be audited
Back to the bad news: you’re more likely to have the IRS place a skeptical eye on your tax return. As a freelancer, there are so many more cogs in your tax machine — more forms, more reporting, more deductions. The simple fact of the matter is that the more going on with your return, the greater the chance something gets inputted wrong or calculated erroneously.
Either that or the IRS may determine that your number of deductions is so absurdly high that they need to make sure they are legitimate.
There’s nothing you can do to avoid being audited and I don’t advise dumbing down your return to avoid it — just be truthful. And, realistically, the chances of you being audited are still very small.
6. It’s going to be complicated and messy
Taxes are complicated. The forms are complex, the paperwork varied, and the explanations of little help (to me at least).
The amount of receipts you have, W2′s to report, and other paperwork lining your desk will pile up and get fairly messy. Don’t expect a few keystrokes and a signature to be everything you need to file.
7. The IRS gets told about every job over $500.00
Filing your taxes is an exercise in honesty, in some ways. You are expected to tell the IRS how much you made and then pay them a certain amount of money based on that. That’s why audits exist — because some people try to “squeeze” the numbers or straight up lie about them.
But the IRS also gets informed about how much you make by the person paying you if they paid you more than $500.00 in a year (and if they are operating in compliance with the law). That’s why you have to fill out forms on every freelance gig you get hired for. They need your information to tell the IRS at the end of the year how much they paid out to people like you and who those people are.
So if you’re thinking about not reporting a certain gig, the IRS probably already knows about it.
8. You’re going to need a paper trail
To accurately report how much you’ve made and also how much to deduct, you’re going to need a paper trail. This includes receipts, bank statements, credit card reports, invoices, and anything else with official finance information on it.
The paper trail doesn’t have to be literal, of course — it can include PDFs and online statements — but some type of proof for what you’ve made and spent is needed.
Why? To help you accurately report deductions. Plus, the IRS can open an audit on you up to 3 years after you’ve filed. Paperwork, in the case of an audit, helps prove you were truthful.
Which leads us to…
9. It’s up to you to be truthful
Filing taxes as a freelancer isn’t like a normal job where all your earnings are neatly reported on one form. It’s up to you to collate and gather the mix of money you’ve earned throughout the year and tell the IRS about it.
Yeah it’s true they get told about all jobs over $500.00, but even some of us wonder if they check through all of those. It can be easy to be tempted to leave “that one job” out of the mix.
It’s up to you to decide whether that’s a good or bad idea (it’s a bad idea, just for reference).
10. There is no way to avoid it, you have to pay
No matter how badly you don’t want to nor how much you wish you didn’t have to, you’re going to have to pay your taxes. Life isn’t like the movies and, most of the time, back taxes will catch up to you even if you do manage to avoid it for a year or two or more.
Don’t let the taxes pile up on you and accrue interest. The IRS can quickly make back taxes prohibitive to pay.
It sucks to watch your hard earned money go to a government that seems incapable of spending it correctly, especially if you’re already on a tight budget, but that’s life and the price of being a citizen.
If it annoys you, go vote for the people who promise to take less of your money. Or vote for the people who promise to spend it on things that matter more to you.
Meanwhile, pay the tax man. Because he’s coming anyway.
Next Up in This Series
- The Basics of Getting Started and Preparing Your Taxes
- Five Pitfalls of Filing Taxes as a Freelancer
- 50 Deductions You’ll Want to Take to Save Money as a Filmmaker
- 10 Must-Do Tips for Filing Your Taxes In the Future
What are some tax lessons you learned the hard way? Do you have troubles filing your taxes? Please share your thoughts in the comments!
Disclaimer: I am not a lawyer, accountant, CPA, financial advisor nor tax consultant. My advice comes from personal experience and research. Please consult a professional if you have any substantial doubts about your situation. Also, this article is applicable only to those paying taxes in the United States (where I live and where I pay taxes).