In simple terms, an IRS audit is like a check-up to make sure you’ve reported your income and expenses correctly for tax purposes. Do you think freelancers are more likely to face IRS audits than others? Or do you think the audit process is fair and necessary to ensure everyone is paying their share of taxes?
Running a business or working as a freelancer has its own set of difficulties, particularly with regard to taxes. Running a successful business depends on maximizing tax savings and making sure that tax filings are proper. Nonetheless, entrepreneurs and independent contractors could wind up in the middle of an IRS audit, even with the best of intentions. We’ll talk about how to deal with an IRS audit as a freelancer in 2024 in this post, along with some advice on how to conduct the procedure well.
As a freelancer, receiving an IRS audit notice can be intimidating. However, it’s essential to understand that an audit is a routine process to verify the accuracy of your tax return. The IRS may request additional documentation, such as receipts, invoices, or bank statements, to support your income and expenses. Knowing what to expect and being prepared can help reduce stress and make the process smoother.
Contents
IRS Resources for Freelancers:
- Form 1099-MISC: Reports miscellaneous income, such as freelance work, to the IRS. This form is used to report payments made to freelancers of $600 or more in a calendar year. Clients are required to provide a completed Form 1099-MISC to freelancers by January 31st of each year.
- Schedule C (Form 1040): Reports business income and expenses for freelancers. This form is used to calculate the net profit or loss from a freelancer’s business. It’s essential to accurately report income and claim eligible business expenses to minimize tax liability.
- Schedule SE (Form 1040): Reports self-employment tax for freelancers. As a freelancer, you’re considered self-employed and must pay self-employment tax on net earnings from self-employment. This schedule is used to calculate self-employment tax owed.
- Form W-9: Provides taxpayer identification information for freelancers. Clients may request a completed Form W-9 to verify a freelancer’s identity and taxpayer ID number.
- Publication 334 (Tax Guide for Small Business): Offers guidance on business expenses and record-keeping. This publication provides detailed information on what expenses are deductible, how to keep accurate records, and how to complete necessary tax forms.
- Publication 535 (Business Expenses): Explains what expenses are deductible for freelancers. This publication provides detailed guidance on business expense deductions, including travel expenses, home office deductions, and more.
- IRS Tax Topic 762 (Independent Contractor vs. Employee): Helps freelancers determine their worker status. This resource provides guidance on the differences between independent contractors and employees, including tax obligations and benefits.
- IRS Tax Topic 416 (Self-Employment Tax): Explains self-employment tax obligations for freelancers. This resource provides detailed information on self-employment tax, including how to calculate and report it.
Recognizing the Foundational Taxes for Freelancers
Because they are regarded as independent contractors, freelancers must also pay self-employment taxes on top of their income taxes. In 2024, the self-employment tax rate is 15.3%; this amount comprises 2.9% for Medicare and 12.4% for Social Security. This rate is applicable to freelancers’ first $147,000 in net income.
To calculate your preliminary tax payments, estimate your annual tax liability based on your freelance income. You can use Form 1040-ES to calculate your estimated tax payments. Consider consulting a tax professional or accountant to ensure accurate calculations. Freelancers can estimate their tax burden using a 1099 tax calculator to help them compute their taxes appropriately. This program calculates an accurate estimate of a freelancer’s tax liability by taking into consideration a number of variables, including income, credits, and deductions.
Preliminary Tax Payments
In order to avoid penalties and interest, freelancers must submit their estimated taxes to the IRS on a quarterly basis. When are quarterly taxes due? These are usually payable on April 15, June 15, September 15, and January 15 of the following year. They are based on the freelancer’s projected revenue for the year.
Preliminary tax payments, also known as estimated tax payments, are advance payments of taxes owed on your freelance income. Since you don’t have taxes withheld from your freelance work like you would with a traditional employer, you’re responsible for making these payments throughout the year.
Making timely preliminary tax payments helps avoid penalties and interest on your tax bill. The IRS requires freelancers to make estimated tax payments each quarter if they expect to owe more than $1,000 in taxes for the year. By making these payments, you’ll avoid underpayment penalties and ensure you’re meeting your tax obligations.
You can make payments online, by phone, or by mail using Form 1040-ES. Be sure to keep accurate records of your payments, as you’ll need to report them on your annual tax return.
By understanding and making timely preliminary tax payments, you’ll avoid unnecessary penalties and stay on top of your tax obligations as a freelancer.
Managing an IRS Audit
Freelancers could nevertheless encounter an IRS audit in spite of their best efforts. A taxpayer’s financial records are examined during an audit to make sure their income and deductions have been reported truthfully. In order to manage the audit process efficiently, freelancers who are chosen for one should do the following actions:
- Maintain organization: Ensure that all of your freelance business’s revenue, costs, and deductions are meticulously documented. Answering inquiries and requests from the IRS will be simpler if your documents are well-organized.
- React quickly: If you get a notice from the IRS that you are the subject of an audit, get back to them as soon as possible and send them any information or paperwork that they ask for. Penalties and interest may be increased if you disregard the warning or take too long to respond.
- Get expert assistance: If you’re not sure how to manage an IRS audit, think about getting assistance from a tax expert. You can reply to any IRS queries and navigate the audit process with the assistance of a seasoned tax attorney or accountant.
- Be sincere and open: It’s critical to be sincere and open with the IRS throughout an audit. Resolving the audit more rapidly and effectively can be achieved by giving accurate information and collaborating with the auditor.
- You have the ability to challenge the IRS’s decision if you don’t agree with the audit’s findings. If you think the IRS made a mistake in their assessment, you may need to file an appeal, which can be a drawn-out procedure.
common mistakes freelancers make
Common mistakes freelancers make:
Mistake 1: Underestimating Income
- Failing to account for unexpected income surges
- Not considering retainer fees or ongoing project income
- Example: John, a freelance writer, underestimates his income by $10,000, leading to a penalty for underpayment.
Mistake 2: Overlooking Business Expenses
- Failing to deduct eligible business expenses
- Not keeping accurate records of expenses
- Example: Sarah, a freelance designer, forgets to deduct her home office expenses, resulting in overpaying taxes.
Mistake 3: Missing Quarterly Payment Deadlines
- Forgetting to make timely payments
- Not setting reminders for payment due dates
- Example: Mark, a freelance developer, misses the June 15th deadline, incurring a penalty for late payment.
Mistake 4: Incorrect Payment Amounts
- Underpaying or overpaying estimated taxes
- Not adjusting payments for changes in income or expenses
- Example: Emily, a freelance consultant, underpays her estimated taxes by $500, resulting in a penalty.
Mistake 5: Not Adjusting for Life Changes
- Failing to update estimated taxes after life changes (e.g., marriage, children, etc.)
- Not considering changes in tax laws or regulations
- Example: David, a freelance photographer, gets married and doesn’t update his estimated taxes, leading to a penalty.
Mistake 6: Not Keeping Accurate Records
- Failing to keep accurate records of income and expenses
- Not documenting business-related expenses
- Example: Rachel, a freelance artist, loses receipts for business expenses, resulting in lost deductions.
Mistake 7: Not Considering Self-Employment Tax
- Failing to account for self-employment tax on net earnings
- Not considering self-employment tax on business income
- Example: James, a freelance writer, forgets to pay self-employment tax, resulting in a penalty.
Mistake 8: Not Making Payments for Multiple Income Streams
- Failing to make payments for multiple freelance projects or clients
- Not considering income from other sources (e.g., investments, etc.)
- Example: Karen, a freelance editor, forgets to make payments for her part-time teaching income.
Mistake 9: Relying on Last Year’s Numbers
- Using last year’s income and expenses to estimate current year taxes
- Not considering changes in income or expenses
- Example: Tom, a freelance developer, uses last year’s numbers, resulting in underpayment due to increased income.
Mistake 10: Not Seeking Professional Help
- Failing to consult a tax professional or accountant
- Not seeking help with complex tax situations
- Example: Lisa, a freelance designer, tries to handle complex tax issues herself, resulting in errors and penalties.
Mistake 11: Not Considering State and Local Taxes
- Failing to account for state and local taxes on freelance income
- Not considering state-specific tax laws and regulations
- Example: Michael, a freelance consultant, forgets to pay state taxes, resulting in a penalty.
In summary, managing an IRS audit as a freelancer in 2024 can be challenging, but with the appropriate planning and direction, independent contractors can effectively complete this process. Freelancers can reduce their chance of an audit and guarantee they are in compliance with IRS regulations by learning the fundamentals of freelancer taxes, accurately estimating their taxes, and adhering to the above-described procedures.