A Freelancer’s Guide to Year-End Tax Preparation
I started preparing for next year’s taxes this October. By the first week of November, I had sent my CPA a prepared document listing my current business income and expenses (also known as the “income statement”) and my expected income and expenses for the remaining two months of the year.
I have also provided additional tax numbers for my CPA, including:
- Money I paid in Affordable Care Act health insurance premiums and the subsidy dollars claimed
- Money I deposited into my HSA and money I withdrawn from my HSA for qualified medical expenses
- Money I contributed to my traditional IRA and SEP IRA
- My Estimated Federal and State Tax Payments
I closed this document with a list of questions, including:
- What is the maximum amount I can contribute to my SEP IRA this year? (Unlike traditional or Roth IRAs, which are capped at a specific dollar amount, SEP IRAs are capped at a percentage of your net self-employment income, which when your taxes are as tough as mine may require CPA assistance to help you calculate. )
- Can I open a Solo 401 (k) in addition to my SEP IRA to spend more money on retirement and reduce my taxable income? (I’m pretty sure the answer is no, but having a CPA is a good thing that you can double-check.)
- Will I have to adjust my estimated tax payment for the fourth quarter to compensate for the overestimation or undervaluation of my first three payments?
- Will I have to pay any Health Insurance Subsidy Dollars, or have I requested the correct amount?
If you’re a freelancer, third-party hustler, or gig economy worker, it’s not too late to start thinking about your own taxes – and as Laura Saunders of The Wall Street Journal reminds us, there are several tax-related tasks that need to be completed before the end of the year .
These tasks include:
- Opening a health savings account
- Opening Solo 401 (k)
- An increase in withholding tax on your W-2 income (this is the salary you receive from your traditional employer; if you increase the amount of tax you pay on your W-2 income, you may not have to pay the same quarterly tax on your freelance income.)
Saunders also lists some of the recordkeeping tasks that do not have to be completed by December 31st, but can still be completed in advance, including:
- By calculating all the income you received from various sources of freelancer / side work / work in the workplace (remember that you have to pay taxes on all of this income, even if you did not receive 1099 forms from each of your clients) or employers with gig- savings)
- Tracking non-deductible business expenses
- Depreciation calculation for any assets you use for your freelance business (such as a car or laptop)
I’ll leave you one more tax-related freelance advice straight from my CPA: if you’ve been thinking about a business-related purchase, whether it’s a new computer, new home office furniture, or tickets to your office. big annual industry conference, spend that money before December 31st.
So it counts as a tax deduction for that year, and when you work as a freelancer, every penny you can deduct from your taxes counts.