There are many reasons that make pursuing a freelance software development career interesting and appealing – but there are also reasons that make it intimidating.
Among these intimidating factors are the fear of ‘business issues’, especially when it comes to handling income taxes. This is easy to understand though, since many web developers do not pay much attention to the application or payment of taxes and how the process works. However, you do not need to fear this anymore, because you can easily learn what you need to do when you are handling tax issues.
Here are some tips that will help you in managing your taxes more efficiently, even as you operate a freelance software development business.
What are the bad aspects of your freelance work?
While being a freelancer is great because of the opportunities it provides, the freelancer has a major challenge to overcome – the taxation rates, which are higher than what you would be subject to as an employee. This is because you are treated as a small business owner, so you will pay the usual rate as an employee would, in addition to an extra tax on all the income your business makes.
This is also referred to as Self-Employment Tax, and it is used when covering Medicare and social security fees (when you are an employee, these taxes are usually covered by your employer).
Aside from that, the tax filings are more complex as well, because of the additional paperwork. This is divided into 3 parts:
W-9 (you send this to clients)
The assumption of a small business is one that sells products on the side. However, offering services on freelance basis qualifies you as a contractor, which means you must report your dealings in form of the W-9 tax format. This will require you to fill the form indicating your details, as well as sending the form to clients.
Profit/Loss from business form/Schedule C
This form is required when you are filing the end-of-year taxes, as it lists all your business expenses and incomes.
This is the tax that specifically caters to people who take on side hustles, including freelancers. This is usually based on the business income you made in the previous year.
How to manage your taxes as a freelance software developer
We understand that the tax adjustments seem tiring to think about, but there are some strategies you can implement to keep track of how things are going in your business. These include:
Keep the personal and business separate
Maintaining the idea of managing these taxes in mind, as well as any other financial obligations, it is important to know that your personal income and business income are always separate – so keep them that way.
This will require you to go to your bank and opening a separate account for your business activities, making it easier for you to keep track of expenses and incomes. If possible, you should add a business credit card – although ensure you use it carefully as it is additional responsibility.
This will ensure you know your spending limits, and will prove particularly useful during the dry spells of the year as it keeps you afloat. As a basic rule, use the average income you make every month as the budget limit, and do regular reviews to adjust budget details when you need to.
Keeping an eye on expenses
The details of taxes will vary across jurisdictions, but the common element to all tax returns is the expenses you have in your business – which means you must keep an eye on them.
This may sound like a tedious task, but it will help you make your tax returns at the end of the year. Ensure you track all your expenses, classify them (for instance, whether they are equipment purchases or marketing ones), and keep all your receipts.
Predict and track incomes
Regardless of the freelancing gigs you choose, it is important to keep track of your income because you still need to pay your bills. Know the details of the amounts you earn, and use that as a basis of your income targets in the future.
At the end of the day, being a freelancer means you have no one to check your finances for you – so learn to manage your tax obligations as early as possible and ensure you start on the right footing.