Don’t Let Tax Season Scare You—Here are Some Answers to Common Questions When Filing as a Freelance Hospitality Professional
If you’re like countless other hospitality professionals who’ve enjoyed the flexibility to earn extra income through on-demand hospitality opportunities—like Poached Shifts—then you might need some help figuring out how to file taxes as an independent contractor.
I’ve spent over 20 years running my own side business as a freelancer, and trust me, I made all the mistakes that could be made. The first year I had any real success, I was slapped with a devastatingly huge tax bill that I simply hadn’t prepared myself for.
To help you avoid a scenario like that, we’ve covered you with a list of frequently asked questions.
How to File Taxes as a Contract Worker
When Do I File My Taxes, and Do I Pay Quarterly Taxes?
Freelancers file their taxes in April, once a year, like everyone else.
If, for example, you’re ONLY doing freelance work and no taxes are being taken out like they are in your paycheck, then you need to pay quarterly tax payments using form 1040-ES.
If you are supposed to be making quarterly payments but don’t—you will incur a fine once you file that year’s taxes.
There are multiple scenarios where you wouldn’t have to make those payments, and it’s very important to know which of those describes your situation.
Here are some examples of NOT having to pay quarterly payments:
You work for a company that takes taxes out of your paycheck, and you only do a little freelance work on the side. This means that your total tax burden for the year is handled by your employer and will cover the taxes that need to be paid from your freelance work.
Your other job as an employee pays most of your taxes automatically. If from your freelance work, you end up owing at least $1000 in federal income taxes at the end of that year, BUT your employer from your other job took $9000 in income taxes out of your paycheck—that means 90% of your taxes have already been prepaid.
Your freelance work is not profitable. Let’s say you pick up catering work throughout the year but doing so requires you to pocket wear and tear on your vehicle, gas to and from those jobs, or you had to pay for a training course to get you more freelance gigs.
If the cost of doing all these things offsets the money you make working catering gigs or makes your tax burden less than $1000, you won’t need to make quarterly payments.
Do I File My Taxes Differently?
Freelancers file taxes normally, just like everyone else.
You can use any online tax filing software, like TurboTax, for a price. Luckily, with products like this, you can see your tax burden (or refund, for that matter) before you decide to checkout and file online.
Back in 2018, the 1040-EZ form was removed, and everyone was told to use 1040. This is the standard form for filing tax returns. You can add additional forms to your tax preparation if you need them.
Using a service like TurboTax can help determine if you need or want to fill out any additional forms. This can be important because many of these forms mean more deductions to your total taxable income.
What Should I Have On Hand While Filing My Taxes?
To file your taxes, you will need several forms that should be sent to you by either your employer or your freelance clients (those you work for as a freelancer).
If you earned $600 or more through Poached Shifts, you will get a 1099-NEC from our payment processor, Stripe, by January 31st. Check your Stripe Connect account to ensure your tax information is correct. If you don’t receive a 1099-NEC, contact our customer service here.
Common forms are 1099-NEC and 1099-K. Your clients will be sending these forms to you and also to the IRS. So, if you get one, don’t think you can keep it secret! If you also work as an employee, you will receive a W2 in addition to the 1099 forms.
If you have receipts for your deductibles, it’s helpful to keep them safe or digitize them, but they do not have to be sent in when you file. There are other forms concerning health insurance coverage or interest income. If you reference these in your tax filing, you may need to include them in your tax return.
What Is a TIN or Tax Identification Number, and Where Do I Find Mine?
Unless you do not have a Social Security number, you probably won’t need a TIN, ITIN, or an EIN.
You can find out if you need an EIN here, or you can check out if you need a TIN or an ITIN here.
How Much Money Should I Save Throughout the Year To Plan for Taxes?
Most tax consultants agree that freelancers should plan to save 25 – 30% of their income for taxes, BUT don’t forget that most of the cost of doing business as a freelancer is tax deductible.
So if you make $15,000 in a year doing freelance work, but you spend $3,000 of that money on your business (the business of being a freelancer)—you can subtract most of that $3,000 from your taxable income.
Here’s an example: $15,000 of freelance income without deductibles could likely mean a tax bill of $4,500 at the end of the year. Applying $3,000 in deductibles to an income of $15,000 could mean a tax bill of $3,600.
If you expect to make anywhere near this much in a calendar year, you would need to make quarterly payments of at least $900, or you may be subject to fines and penalties for underpayment of taxes once you file.
Don’t forget that if you work freelance AND work for an employer, the employer will be taking taxes out of your paycheck and could offset some or all of your need for quarterly payments.
What Items Can I Expense?
There are many, many, MANY different things that the government considers the cost of doing business.
This list will not be exhaustive, but I will try and make examples that will be relevant to you. For a nice comprehensive list, I found this Forbes article helpful, and also this Keeper article.
For caterers and cooks: Any food or ingredients you use to cook meals for clients are write-offs. Dishes, utensils, napkins, and other serving items can be deducted from your taxes. Bowls, pans, containers, and whatever you use to transport food to an event are write-offs.
Office equipment like computers, printers, and your cell phone itself—if you use it solely for your business ; ) you can write it all off that year or depreciate it over time. Depreciating an expensive computer over time can be helpful if you don’t plan on buying a new computer every year.
Your vehicle, everything from gas to tires to your lease payment, can be a deductible IF you are clear about how much of the vehicle you use for your freelance work vs. your personal use. That does mean every time you drive to a gig, you mark down or note the miles you drove, then at the end of the year—if 50% of your driving was to freelance gigs, then 50% of the cost of owning that vehicle is deductible. Also any parking expenses, cabs or trains to work.
Business and Health Insurance—you can write off your health insurance costs for you and your dependents. If you need business insurance as a freelancer, this is also deductible, although it is rare.
Education—classes you take to become better at your craft are deductible.
Professional fees – I love to put the cost of preparing my taxes here every year, but it can also include bookkeeping, accounting, or any legal fees for the business. (think trademarks or contracts you’ve had a lawyer prepare or review).
Advertising, marketing, and internet-related expenses—If you make a website for clients to find your catering business, all the costs of running that site can be deducted. Note that this is NOT where you’d write off your home internet service or phone bill—for that, see the Home Office Expense below.
The lovely and nebulous home office expense: anyone with a spare room that you use only for business ; 0 can be used to calculate a percentage of your home bills as ‘business expenses’. If you live in a 1400 sqft apartment with a spare bedroom that is 350 sqft – 25% of your electrical bill, internet bill, and even your rent is being used for your business. This room can’t be a spare closet, though, so make sure if the IRS knocks on your door, they don’t find clothes, a dresser, and a bed in there. Unless your business is sleeping and playing dress-up, which actually sounds like a rad way to make money.
What if I Fail to File Taxes, Falsify, or Enter Incorrect Information?
Don’t do this. The penalties are higher than you are right now.
The Failure to File Penalty is 5% of the unpaid taxes for each month or part of a month that a tax return is late. The penalty will be at most 25% of your unpaid taxes, but it will continue to accumulate until you file and pay.
The fine for failing to file a tax return is $25,000 per year. If you’re found guilty of tax fraud, it can also mean three years in prison and up to $100,000 in fines.
Unless, of course, your name happens to be Donald Trump, then I guess you just get to be president.
What if I Can’t Pay the Taxes I Owe This Year?
If you can’t afford to pay your taxes, the worst thing you can do is not file! It’s okay to file your taxes and not send a check in with them, you may get a small fine, and the amount you owe will accumulate interest, but this is way better than the fine for filing late or not at all.
You can also add a payment plan request form to your taxes at the time of filing and request to pay what you can afford. So long as you aren’t already making payments on a previous year: most of these requests get approved.
Filing taxes as a contract worker can take some getting used to, but with forethought and planning— it’s really nothing to stress over. If you have more questions or are unsure what to do, it might be worth seeing a professional as you get used to your obligations as a contractor. Otherwise, you can always visit the most entertaining site ever, https://www.irs.gov/.