The option of going freelance, being your own boss, deciding your own time, and taking on projects that you love is an extremely attractive prospect. As there are plenty of advantages to freelancing, there are some downsides to it too. The apprehension to not strike it out on your own is primarily due to the lack of security and also the requirement to do everything on your own. One of the primary reasons why some developers choose NOT to go with the freelance life is the ‘business’ related issues- from having enough at the end of the month to cover expenses, licenses, marketing, managing facilities, and the ever-dreaded income tax filing.
If you are a freelance developer, take comfort in knowing that there is a good amount of savings that you can obtain from employment taxes. This can be done through the ‘Pass-Through’ element. Essentially, you can file your business as:
- A sole proprietor and file it under ‘Schedule C’. This method enables you to categorize your business revenue and expenses on the personal tax return
- Start a separate business entity such as an LCC. This would enable you to file a tax return on expenses, revenue, and net income.
Here’s how you can simplify your freelance developer taxes:
If you get a paycheck from a job
In this case, you’re basically used to paying 6.2% of your salary for Social Security and Medicare. These are considered your employment taxes. You still need to pay these taxes even as a self-employed individual in the form of “self-employment tax.”
If you start an LLC and do an S Corp election
In this case, you will need to categorize yourself as an employee of said business. Regular payroll needs to be conducted in this instance, and this also means you need to give yourself a sensible salary to yourself. The percentage out of your paycheck will still be at 6.2% that will go for your Social Security as well as Medicare taxes. Whatever profit you earn apart from the salary you get is spared from the self-employment tax. This usually results in a savings of 6.2%. However, that profit is still subjected to regular income tax.
Other Expenditures to Track as a Freelance Developer
Mileage for your business
Yes, even the mileage you accumulate on your business travel and trips is tax-deductible. The IRS in 2018 allowed for self-employed people to deduct this at a rate of 54.5 cents per mile. In this regard, it is vital to understand what ‘business mileage’ means. If you drive to and from a customer’s location, that means you’re driving for work. Any kind of justified and reasonable work-related travel is categorized as a work expense. Say you drove somewhere to have lunch meetup with other developers, which is also considered a work-related networking event. These are all the various examples of how you can add up your work mileage. Keep in mind that the money you spend during these networking events and functions can also be considered tax-deductible. The bottom line is, make sure to always track and file your expenses in its specific categories, so you know what is deductible and what is not. This not only saves time but saves you from paying unnecessary taxes.
Track your expenditure on computers and office equipment
Just like how a company office needs equipment, a freelance developer would also need the equip their workstation with the appropriate hardware. If you are purchasing a new computer for work, that is most likely a work expense. This includes the printer, scanner, toners, and other similar office equipment. The laptops, desktop screens, mouse, and mouse pad are also considered a work expense. As a freelancer, you have to set up your workstation to ensure you can perform your business and work duties appropriately and in an efficient matter. This means as a freelancer; you will also come to see that there indeed a number of tax advantages for you. If you purchase equipment for the purpose of your home office, then it’s likely that it will be deductible.
Bottom Line
The above is just a brief overview of the kinds of tax issues that freelances (and even small businesses) need to deal with. Once you begin running your business, start filing your taxes, doing the paperwork and so on, you’ll come to find that it is not as complicated as you thought. These tax issues should not be a reason to hold you back from making it on your own or starting a business.
