When you’re self-employed, doing your own taxes is another way to make sure that the money out doesn’t outweigh the money coming in.
While America has an income tax system that benefits investors and those who own real estate, the system also gives a shout out to freelancers if they learn to stretch deductions to their advantage.
The two years that I worked solely on my book manuscript and photography were the first years I considered myself a freelancer, and having an accountant that knew which questions to ask me proved invaluable.
Figuring out your self-employment tax isn’t rocket science, though, so if you oppose putting the money you spent in taxes back into the pocket of a tax specialist, then you can follow the tax forms and what to do below to make sure the money out doesn’t outweigh the money in.
Start a Spreadsheet or Buy a Copy of TurboTax.
Best to organize your receipts and income as you go. TurboTax will walk you through preparing your taxes step-by-step, which will allow you to go through the process quite easily on your own.
If you would rather have your accountant do the dirty work, then keep track of your income and expenses in a spreadsheet, along with any receipts for business expenses, and hand both over to your tax accountant at your annual tax appointment.
8829 Form: Expenses for Business Use of Your Home
This is my favorite form because my accountant explained to me that if any area of my home was used for business purposes, then it could be deducted.
Measure the square footage of your separate office or the room where you do your freelance work, then a portion can be deducted from your rent or mortgage and reported on Form 8829. You can also apply this if you use your office for meetings with clients.
4562 Form: Depreciation and Amortization of Business Equipment
Form 4562 allows you to deduct your computer, printer, or any other equipment relating to your work, though you will need to keep record as to how much you use the equipment for business vs. personal if you ever are audited.
With a limit of $125,000 on equipment purchased, most freelancers will want to claim this deduction in one year, but if the equipment total exceeds your total taxes spent that year, then it’s best to depreciate the equipment cost and deduct part of it the following year.
Schedule C Form: Profit or Loss from Business
This form attaches to the 1040 form and is where you report your income and expenses (saved receipts from business expenses) if you are freelancing or working on a project that will hopefully produce income in the long run (i.e. a screenplay, Web site business, or book manuscript, to name a few).
If you are solely freelancing, and do not receive a regular paycheck from a day-job where you may work twenty or more hours a week and they deduct taxes for you, then you should fill out Schedule C.
Whether you receive a 1099 from an employer or not (by law, if you are paid more than $600 from an employer, they have to send you a 1099), it is your responsibility to report any income.
1040 Schedule SE Form: Self-Employment Tax
Depending on your earnings as a freelancer, you’ll be able to fill out a short form or long form.
Self-employment rate is 15.3 percent, with 12.4 percent going toward Social security (old age, survivors, and disability insurance) and the other 2.9 percent going toward Medicare (hospital insurance).
You can deduct this tax from your adjusted gross income, which you will report on the next form, your good old friend, the 1040.
1040 Form: U.S. Individual Income Tax Return
Once you’ve filled out all of the above, and your financial life is simple, then the final step is to fill in the info from the other forms on the final 1040 form.
All tax forms and instructions can be found on the IRS Web site and detailed instructions on the ins and outs of the 1040 form process can be found on 1040.com. Make sure to use the forms and instructions from the IRS site, which are current and up-to-date.
This story first appeared on More by Amanda Coggin.