There are a lot of great things about being a freelance writer. You can choose your niche, work your own schedule, and get paid what you know you’re worth rather than waiting on a pay raise that might never come. There’s one thing about a freelance career that’s consistently awful: taxes.
If you’re a veteran freelancer, you already know that your self-employment taxes are higher than those receiving a regular paycheck because you pay the employers’ contribution to Social Security and Medicare. Paying in one lump sum (either quarterly or annually) is another big challenge because even the top-earning freelance writers struggle with cash flow thanks to a delightful combination of the high cost of being a freelancer and a long list of outstanding client invoices.
While tax season is already here, there are still some things you can do to make this year slightly less painful than the year before. No, the answer isn’t running away to a tax haven like the British Virgin Islands — but you do deserve a vacation. Here’s what you need to know to make 2020’s extended filing deadline of July 15 a little easier.
Figure Out Your Tax Status
Hear ye, hear ye. On January 1, 2020, California went where no state has gone before. It stood up to Uber. It told Lyft to go home. It … made life really complicated for freelancers in every single sector, including and especially freelance writers. If you’re reading this after being dumped from a California company, we don’t have to tell you how difficult it is to navigate this new reality.
Although your status won’t necessarily impact you at the federal level, it is important to figure out your current tax status in your own state. Depending on your state, you may find that you may not be as independent as you think you are. Your state may even classify you as an employee, even if your employer doesn’t.
Research your state’s labor laws, and then talk to your employer about whether you need to re-define the relationship. While this may sound strange, you may find yourself in a place where your client is trying to pass off your labor without giving you the full benefit of employment, which ultimately costs you money.
Create Tax Incentives through a Business
The United States has a wildly flexible system that allows freelancers to operate without registering or register and manage a business (with your state). As a freelance writer, you have the option of doing both. On its face, it doesn’t really make a difference, but as your career continues, your structure can be very important for both taxes and general success.
Forming an LLC can be a very strategic step for full-time freelance writers who choose this work as their main career. An LLC (or limited liability company) gives you cover if something goes wrong, such as if you take a client’s check and run away to the British Virgin Islands with it and they sue. For example.
An LLC also offers you real tax benefits because you become what’s called a pass-through entity. Essentially, it helps you manage your tax bill (legally) and it’s one of the few items that benefited from the Tax Cuts and Jobs Act of 2017, which rained down devastating cuts to popular deductions. Working with LLC taxes will be more complex than your freelancer 1099, so it’s worth considering the pros and cons (and the cost of accountants) before moving forward, especially if you’re not yet earning a full-time income from writing.
Setting up an LLC is straightforward. You don’t need a lawyer or an accountant yet. It usually requires submitting a form and paying a small fee. Though, it’s a good idea to hire representation if you’re going in with a business partner (or partners).
Start Saving for 2021 ASAP
Out there in the world of W-2 employees, one in five people think they’ll owe the IRS money in July — and these are people who pay in every paycheck. You need to pay monthly or quarterly, and you’ll pay in bulk. No matter what income level you’re at, paying in is stressful, and anyone who says it isn’t can’t be trusted.
Make 2020 the year that you get ready for 2021 before panicking in January. Use this tax year as your guide to identify how much you’ll earn and how much you’ll owe and then save it up.
You should be aiming to set aside 30% of your income for taxes. It sounds like a burden, but it’s what would happen if you seek full-time employment. You need to pay both your income tax and your FICA tax, and if you don’t, the IRS will charge you interest and fees. Do you really need to save 30%? Yes because half of it will go to the self-employment tax.
Does 30% sound impossible? You have two options: cut back on expenses and stick to a stricter budget (boo) or take time to start increasing your income by raising your rates (yay). We think you know which one sounds like more fun.
Making a living as a freelance writer isn’t always easy, but when it’s good, it’s really good. You can make taxes and finances a bit easier by making strategic business decisions with clients and keeping tax season in mind as you grow and shape your business.