Navigating the Tax Landscape for Freelancers in 2019: 7 Crucial Mistakes to Avoid
If you’re earning money through self-employment, even if it’s just a side gig, it’s crucial to stay informed about recent tax changes. For those new to filing self-employment income taxes, understanding the income you report, the rates you pay, and the deductions you claim is paramount.
Working for yourself, even part-time, alters your tax situation significantly compared to those with only W-2 income. Failing to comprehend the impact of self-employment income on your taxes can escalate the risk of audits or, worse, unexpected taxes and penalties.
Here are seven key tax mistakes freelancers should be wary of when filing 2019 taxes:
Mistake 1: Neglecting to File 2019 Self-Employment Tax
Understanding the distinction between various types of income is vital. Self-employment tax rates differ from regular income tax, and grasping this difference is essential. Self-employment tax covers Social Security and Medicare (FICA) taxes, and freelancers are responsible for the entire 15.3% (7.65% for Social Security and 2.9% for Medicare) out of their own pockets.
Mistake 2: Overestimating Deductions
Being overly aggressive with deductions to maximize refunds is a common pitfall. Freelancers face increased scrutiny from the IRS, so it’s crucial to thoroughly understand and document deductions. Exact details of business-related expenses, from travel to equipment purchases, must be well-documented to avoid audits.
Mistake 3: Forgetting to Prepare Self-Employed Tax Form 1099s
Issuing 1099s to vendors paid over $600 in a year for legal or professional services is essential for documenting expenses. Neglecting to issue 1099s can complicate expense documentation and result in missed deductions.
Mistake 4: Overlooking the Home Office Deduction
Freelancers working from home may qualify for a home office deduction, allowing them to deduct a portion of rent, utilities, and other home-related costs. Understanding the eligibility criteria and restrictions is crucial.
Mistake 5: Misinterpreting Non-Reimbursed Mileage
The deduction for non-reimbursed mileage is a valuable perk. Tracking business-related travel and deducting the IRS-approved rate per mile ($0.58 in 2019) can significantly reduce taxable income.
Mistake 6: Neglecting Payroll Taxes
Freelancers with employees, even independent contractors, are responsible for filing and paying payroll taxes. Proper worker classification is crucial to avoid legal issues.
Mistake 7: Failing to File and Pay on Time
Filing and paying taxes promptly is non-negotiable. Extensions are available, but they only apply to income tax returns, not other tax-related responsibilities like sending out 1099s or payroll taxes.
In conclusion, freelancers need to be well-versed in the nuances of the tax code for self-employment. Seeking guidance from a CPA and staying informed about tax regulations can make the process smoother and prevent costly mistakes.
