Note: I am not an accountant, so please take this advice with a grain of salt. The below things work for me and a number of other freelancers, but just because it works for me, it may not work for you and your situation. Also, this article is focused on freelancers working in the United States and may not apply to other countries. I cannot be held liable for information in this article when acted upon, nor the content and accuracy of the links I provided.
Income and Expenses
It is important that you keep up with your income and expenses as a self-employed freelancer. I hope you have been keeping track of it somehow throughout the year, but if you haven’t, then now is a good time to get all of that in order. A good place to start is to look at your invoices. Look to see how much you have billed and either look or recall if they have been paid. Start an Excel document or a list of all invoices paid and all invoices withstanding. Depending on the accounting system you use, cash or accrual, some or all of this information will be needed. In a nutshell, if you are on a cash accounting system, which is the system most freelancers use, you count income as when you receive a check; if you are on an accrual accounting system you count income as what you billed.
As for expenses, this is where things can get hairy. All of your business expenses should be recorded somewhere (Excel/Numbers, online bookkeeping program, or something) and you should have all receipts. Ideally, you have written what you purchased on the receipts and why. Such expenses that you will want to make sure you have a record of them are office supplies (ink, pens, paper, etc), individual client expenses (printing, website hosting, etc), technology/equipment purchases (computers, printers, hard drives, etc), prospective expenses (lunch meetings with clients or prospects), and travel expenses (which is a bit more hairy, but include mileage to and from meetings, etc). With these types of your expenses, your accountant will determine what is acceptable in the eyes of the IRS and what isn’t. For instance, most of the time any time you pay for lunch with a prospect, you must state on the receipt who it was with and what you discussed, and even then the IRS will only allow you to deduct half of that.
In the eyes of the IRS, they want you to report ALL of your income, but don’t really like for you to deduct ALL of your expenses. Here is a link for you to read more about what expenses can be deducted in the eyes of the IRS (remember that some may not apply due to your situation as a student, or if you still live at home with your parents, etc).
Independent or Dependent Status
Being a student, your parents may be claiming you as a dependent. This does affect your taxes. If your parents are paying for more than 51% of your living expenses, sometimes even if you are not living at home, they should claim you as a dependent. Other “tests” apply, however and should be reviewed here.
For most student freelancers, their parents are helping pay for their living expenses, food, clothing, and schooling, and are living at home, which meets most of the tests required by the IRS. If your parents can claim you as a “qualifying child” or dependent, then you must note this on your taxes as well.
Being claimed as a dependent affects your “standard deduction” on your taxes (line 40-2009). This is why it is important to accurately report to the IRS if you are a dependent.
Self Employment Taxes
Since you are not employed by a company who takes taxes out of your paycheck every payday, you are still responsible for such things as Medicare and Social Security. This is where self-employment taxes come in. The IRS has a separate form, called a Schedule SE, in which everyone who claims to be self-employed must fill out to determine their tax liabilities. Once filled out, this will be reported at half the amount on your 1040 form.
To read more about self-employment taxes and the Schedule SE, please refer to this link.
Business Profit or Loss (Schedule C)
This is where your income and expenses come together. This form, a Schedule C, is required of most businesses. Stating your income and deducting your qualifying expenses will leave you with your net profit or loss, which is then reported on your 1040 as business income.
For more information about business profit or loss and the Schedule C, please refer to the link.
Scholarships, Loans, Grants, and School Expenses
Yes, as a student you can claim these expenses and benefits on your taxes. Although most of the time you will not have to pay taxes on these things especially if you received more financial aid than you used, it is best to still report it. Unless your parents report it on their taxes, you should take your 1098 T that your university sends you and report it on your taxes.
Again as with it is for your business, you should keep a record of all financial aid paid, given, and your school expenses such as books and supplies so that you can accurately report this on your taxes.
Just about everything you need to know for your particular situation can be found here.
1099’s from Clients
Your clients may ask you for your information so that they can send you a 1099 form in February. This is often considered similar to a W-2, however, does not report the same information. If any of your clients paid you more than $600 during the tax year (often from January 1st to December 31st of the tax year), then expect a 1099 from your clients. You will know in advance if they send you a 1099, because they will need your Social Security number in order to file this information.
All that shows on a 1099 is the amount they show that they paid you during the year under “nonemployee compensation.” Check to verify that this matches your records, which should be as easy as adding all of their payments they sent to you. The 1099 they send you is also sent to the IRS, but it should also be included with your 1040, Schedule C and Schedule SE, along with all of your other tax forms.
Although not as common, there could be a situation where you paid another freelancer or business more than $600 for their services during the year. If this is the case, then you will need to send a 1099 to that person. To request their information, you will need to send a W-9, which is a request for taxpayer identification information.
For more information about 1099s for taxes, please refer to this link.
To find out more about issuing W-9’s, read here.
State, County, City, Sales, and Business Taxes
Based on how your business is set up and where you live, you may have other taxes to pay as well, such as a state income tax and sales tax. Again, this is where it comes in handy to have an accountant to navigate that as well. You should know if you have to pay taxes in a state income tax and if you have formally filed for a business license, however just because you haven’t done those things doesn’t make you exempt.
For a quick bit of information about state income taxes, visit this link.
Seek an accountant
If all of the above went over your head, you have stopped reading before this point, or the thought to taxes make you itchy, then it may be best to seek an accountant. Also, if you have a unique situation, such as having a child as a dependent, being married, being a part-time student, being a grad student, being an independent student, employed while freelancing, etc, you should seek an accountant as well. It is best to seek an accountant ASAP and before February when tax season really picks up.
Find an accountant well versed in proprietorships and self-employed small business taxes, as well as one that can navigate through the student issues you have with scholarships and expenses. Accountants often carry an expense that are often three-digits, but it is well worth it to make sure your ducks are in a row and the IRS won’t come knocking on your door (unless you didn’t accurately report information to your accountant). Just remember, the amount you pay your accountant can also be claimed as an expense on your next year’s taxes.
This article is not all inclusive
Although I tried to include everything I know about taxes and where to find more information, your unique situation may require more or less than what I have stated above. Again, this article is just for informational purposes and should serve as a motivator to get your tax ducks in a row. Be sure to ask your accountant about any and all of the aspects above to see how they affect you.
For specific information about taxes, the IRS website is a great resource. Also, be cautious about taking advice from family, friends, and other websites that is not authored by the IRS, because even though they have good intentions, the information could be inaccurate or not apply to you.
Have any tax tips for our fellow student freelancers?