I'm freelancing, how do I pay my taxes?
Freelancers generally find they have a more difficult tax situation than most employees.
As you've probably already heard from your favorite news sites, tax refunds are smaller than usual for those who are still receiving them and a large number of individuals who would normally have received a tax refund actually owe taxes this year. Let's dive in and give you some answers as to why this is happening and what you can do about it if you find yourself having to pay taxes this year.
The TCJA (Tax Cuts - Jobs Act) has been the most significant piece of tax reform in the past 30 years. Some of the things that the TCJA has changed include doubling the standard deduction, doubling the child tax credit, and capping the state tax and mortgage interest deductions. All of these changes (and some other ones) have changed the way that taxes are calculated by individuals. Additionally, withholdings, (the portion of your paycheck that your employer sends to the government to help you cover your taxes), were reduced in anticipation of the tax savings that were passed onto most taxpayers. The problem lies in the withholding piece of the equation. Because the tax reform was so vast and radical, it became hard for payroll departments to estimate what their employees' tax liabilities would look like. This resulted in an oversized reduction in withholding that ultimately led to smaller tax refunds or larger tax payments to be made at tax time.
If your refund came in lower than anticipated, there may be some things that you can do to bolster your refund next year (2018 is water under the bridge). You can start by adjusting your withholding so that your paychecks get a little smaller now, but your refund will be a bit higher. Although, some would argue that by doing this, you're effectively giving Uncle Sam an interest free loan; but still, there are some people that like to have that bump in cash flow at the beginning of each year. If you're in a transition year (i.e. had a child in 2019, bought a home in 2019, etc.) your tax situation will definitely change and you should consider some of the strategies that we talked about in our post on Maximizing Your Refund.
If your refund turned into a tax liability, the number one thing that we recommend that you do is apply for a payment plan with the IRS. They'll arrange for you to make monthly payments to help ease the burden of that unexpected financial setback. Taxfyle can help you apply for this payment plan. Furthermore, in light of the unexpected impact of the tax reform, the IRS is waiving all underpayment penalties for those that have a tax liability to pay this year.
You should also consider adjusting your withholding to ensure that you don't have the same problem next year.
We know that having your refund shrink a bit or even worse, having your refund turn into a tax liability, isn't fun or easy to deal with. But to the extent possible, we want to help you by providing this information and helping you take the necessary steps to remediate the impact.
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