When it comes to filing an annual return, freelancers, independent contractors, and other self-employed workers have different obstacles to overcome than those with a typical 9-to-5 job. One way to make sure you’re prepared for tax season is to keep year-round business records that are distinct from your personal ones. Since the money isn’t routinely taken out of your paychecks throughout the year, you’re also in charge of making and keeping track of estimated tax payments(opens in a new tab).
The most annoying part is that, unlike people who work 9 to 5, you might actually need to pay more in taxes this year if your estimated payments were less than necessary. (You might even face consequences if you completely failed to pay them.))
Oh, and don’t forget to take into account the staggering 15.3% federal self-employment tax you’ll have to pay if your freelance work brought in at least $400. Yes, it contributes to Social Security and Medicare, which is great for Future You — possibly? — but less enjoyable for Present You.
If all this talk about taxes hasn’t already made your head spin, keep in mind that a QuickBooks survey of 500 independent contractors revealed that filing taxes is one of the most challenging tasks facing today’s self-employed workers. More than a third of freelancers don’t even bother paying taxes because of how annoying and tedious the process is, according to the same survey.
It is in your best interest to file your return each year because tax evasion is essentially a felony. But merely submitting your taxes is insufficient. If you try to figure it all out on your own and make a mistake, you might still be subject to steep fines and interest. Alternatively, you could always visit a CPA and have them handle your income tax return for you, but their fees might also break the bank.
Consider purchasing some tax software for a solution that strikes a balance between the two.
What is tax software?
The purpose of tax software is to assist users in complying with tax laws and identifying any potential deductions and credits while assisting them in the preparation and filing of their returns. In essence, it’s software that makes doing your own taxes easier.
Tax software used to be available on CD-ROMs that you could download to your desktop computer. (How archaic.) Today, all you need to do is download a programme from the website of a reliable tax preparation service. Or, for maximum convenience, some tax preparation tools are entirely online or accessible via a mobile app.
What should you look for in a tax software program?
According to the IRS, “freelancer” is synonymous with “self-employed business owner” (more specifically, “sole proprietor(opens in a new tab)”). As a result, you’ll report your business income and expenses on a Schedule C and your self-employment tax on a Schedule SE; include both with your Form 1040, the standard individual tax filing form. That documentation, as well as Form 1099-NEC(opens in a new tab), the non-employee income statement you get from your customers in place of a W-2, will unquestionably need to be supported by the tax software you use. If your client(s) paid you at least $600 using a third-party payment network, such as Venmo or PayPal, you could also get a Form 1099-K(opens in a new tab).
Other attractive features include:
- An easy-to-use electronic filing method with simple questions and prompts
- Guarantees of accuracy and maximum refunds
- Good customer service, including the ability to contact a live tax professional in an emergency
Remember that in addition to filing your federal taxes, you must also submit your state taxes (unless your state does not collect an income tax; see Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming). Although some tax software vendors provide one state free of charge, the majority charge you for each state where you need to file.
Additionally, bear in mind that the greatest tax software choice may not always be the cheapest. The application you use should be capable of handling complex tax circumstances, seeing several potential deductions, and being ready to provide a high degree of protection in the event of an audit. In other words, now is not the time to cut corners; you need to do your taxes and complete them correctly. Making sure all of your bases are covered is better than paying for services you don’t need.
What can freelancers write off on their taxes?
Speaking of deductions, the one major advantage that freelancers have over full-time employees during tax season is their ability to deduct a much wider range of business-related costs, such as office supplies, internet fees, meals, education, mileage, health insurance premiums, and the portion of your rent that goes toward your home office. But be careful: According to the IRS, these costs must be “both usual and required” for your company. (For instance, you couldn’t write off a road trip you took for leisure.)
Does hiring an accountant to handle your taxes make sense?
You may be able to get away with a free filing option via the IRS’s Free File programme if your tax situation is very simple, you’ve been filing as a freelancer for a while, you earn less than $73,000 annually, and/or you meet one of the other criteria listed above (opens in a new tab).
However, the majority of independent contractors will have sufficiently complex tax circumstances to need a paid software solution with premium features and built-in help from seasoned tax experts. Spend around $105 on your federal return and $50 on each state return.
All of this is to imply that although hiring a real, live CPA is generally not necessary, it is an alternative if you are uncomfortable with filing on your own. An itemised Form 1040 with a state return costs an average of $343, a non-itemized Form 1040 with a state return costs $220, plus $192 for a Schedule C and $41 for a Schedule SE, according to a poll by the National Society of Accountants. The majority will also charge you for incomplete or unorganised files ($165.82 on average) and 1099s ($67.72 on average).
Which tax software is best for freelancers?
Here are the software choices that we advise for the 2023 tax year and which support Schedule C, Schedule SE, Forms 1099-NEC, and Form 1099-K. (Note: All of the goods listed here went live in the autumn of 2022.)
H&R Block Self-Employed Online
The H&R Block seamless online self-employed package(opens in a new tab) is the greatest choice for a freelancer who lacks the confidence to do their taxes alone. It works by guiding you through a series of straightforward, conversational inquiries similar to those you’d anticipate from a genuine live CPA.
To ensure you get the largest return possible, it will assist you in claiming a variety of industry-specific deductions and company expenditures, such as asset depreciation and student loan interest. (This, along with Audit Support, 100% Accuracy, and No Surprises, are among its four main assurances.) You can even use your return to pay for it because you won’t have to till you actually file.
But H&R Block’s extensive user assistance offerings are what really set it apart: You can get in touch with technical support via phone and chat, access online tax preparation and software hints on its comprehensive support centre (opens in a new tab), get unlimited, on-demand assistance from a live tax expert with Online Assist (opens in a new tab), or schedule an appointment (opens in a new tab) at an actual H&R Block location for IRL assistance.
The last two will cost you more, but they can be worthwhile if your tax situation is very complicated (for example, if you have many sources of income) or if you’re struggling with a problem that requires more help than the accounting software can provide.
TaxAct makes similar features to TurboTax and H&R Block at a cheaper pricing range, and it mainly succeeds. In addition to year-round tax preparation assistance, a real-time refund status, several import possibilities, and a Deduction Maximizer that identifies the deductions that taxpayers just like you most often claim, it also offers a Self Employed(opens in a new tab) online package. However, audit defence must be purchased separately via ProtectionPlus(opens in a new tab), and the filing procedure is not conversationally guided. Additionally, there is no chat assistance available for beginners.
On the bright side, TaxAct was at the time of writing waiving prices for its Xpert Assist(opens in a new tab) service on all returns, enabling unlimited phone support from its CPAs. They may provide guidance throughout the return preparation process and review your taxes before you file. That’s a lot when you consider how much its rivals charge for in-person professional assistance.
Consider TaxSlayer if you’re ready to sacrifice some of the more sophisticated features available in exchange for spending just half of what TurboTax charges. In addition to supporting all relevant forms, its Self-Employed software (opens in a new tab) offers free audit defence, live chat help, and the option to speak with a tax expert (opens in a new tab) with knowledge in the self-employed if you encounter problems. (Its simpler Simply Free and Classic packages only provide email and phone support.) Additionally, much like H&R Block, the program’s zero out-of-pocket expenses guarantee enables you to utilise your return to pay for it.
Notably, TaxSlayer does provide a bit more consideration to functions you may use outside of tax season, such as reminders for your quarterly projected payments and customised tax and income suggestions. If maintaining organisation throughout the year causes you more difficulty than actually filing, you should definitely check into it.
Intuit’s TurboTax is essentially the reason we have to pay to file our taxes; yet, to its credit, the software is really sleek and amazingly simple to use even in the most complex tax circumstances (i.e., yours).
The most expensive application on our list is TurboTax Self-Employed(opens in a new tab), but it doesn’t skimp on features or functionality. TurboTax will ask you a series of straightforward questions to fill out the relevant forms and filter through more than 500 industry-specific tax deductions for mileage, travel, entertainment, and other expenses using a pleasant, interview-style interface.
You may autofill your 1099-NEC by taking a photo of it on your smartphone, and it will let you to input data straight from platforms like QuickBooks Self-Employed, Square, Uber, and Lyft. Its only true drawback (apart from its steep price) is the lack of in-person support; however, other choices include phone/chat support, the TurboTax forums, a comprehensive FAQ section, and live virtual expert help(opens in a new tab) (for a charge).
FreeTaxUSA Self-Employed Taxes
Cheaper, more constrained tax preparation options like FreeTaxUSA are often out of the question for independent contractors but are still worthwhile for experienced filers who feel comfortable doing away with the training wheels. The cost (or lack thereof) is by far the most noticeable advantage: You may submit your federal return for free via its Self-Employed Taxes(opens in a new tab) category, and a single state return will only cost you $15.
Neither will FreeTaxUSA comb through as many deductions as some of the heavy hitters (just 350 against TurboTax’s 500+), nor will you find any educational, interview-style questions here. A live chat and a jargon-filled FAQ section are your only alternatives for customer service; if this is your first time, skip them. However, its support for Schedule C and Form 1099-NEC as well as a feature that enables the transfer of prior-year data from other platforms (such as TurboTax, H&R Block, and TaxAct) result in a respectable, albeit basic, package.