Navigating Taxes As A Millennial Freelancer - Money Mastery Millennial (2024)

Are you a freelancer or self-employed? Do taxes make your head spin? Well, you’re not alone.

As a generation, we have a lot on our plates, and navigating the complicated tax system can be overwhelming.

But fear not, because, in this article, we’ll be diving into the world of taxes and providing you with tips and strategies to make tax season a little less daunting.

According to a study by Upwork, by 2027, the majority of the U.S. workforce will be freelancers.

As more and more millennials turn to freelance and self-employment, it’s important to understand the tax system and how it applies to our unique work situations.

Whether you’re a full-time freelancer or just doing some side hustles for extra income, taxes are an unavoidable part of the process.

In this post, we’ll cover everything from understanding the tax system and available deductions to retirement planning and tax preparation.

By the end of it, you’ll be equipped with the knowledge to navigate taxes like a pro and hopefully save yourself some money in the process.

So, let’s get started on our journey of navigating taxes as millennial freelancers and self-employed individuals!

1. Understanding the Tax System

1.1 Types of taxes

Taxes are an unavoidable part of life, and understanding the different types of taxes can help navigate the tax system.

Here are some of the most common types of taxes:

• Federal Income Tax – This is the tax you pay on your income to the federal government. The tax rate varies depending on your income level and filing status.
• State Income Tax – Some states also have a state income tax, which is a tax on your income to the state government. Not all states have a state income tax, so it’s important to check whether your state does.
• Social Security and Medicare Tax – This tax is also known as FICA (Federal Insurance Contributions Act) tax and is paid by both employees and employers to fund Social Security and Medicare programs.
• Sales Tax – Sales tax is a tax on goods and services purchased and is typically a percentage of the purchase price.
• Property Tax – This tax is assessed on the value of the real estate and is typically paid to local governments.
• Excise Tax – This tax is applied to certain goods and services, such as tobacco and alcohol.

1.2 How taxes are calculated

Taxes are calculated based on the amount of taxable income you earn in a year.

Taxable income is the amount of income you earn that is subject to taxation after deductions and credits.

Here are some key factors that are considered when calculating taxes:

• Tax Brackets and Rates – The tax system uses a graduated tax system, which means that the more you earn, the higher your tax rate will be. Tax brackets are used to determine your tax rate based on your income level.
• Deductions and Credits – Deductions and credits can help reduce your taxable income and the amount of taxes you owe. Common deductions include expenses related to business, home mortgage interest, and charitable donations. Tax credits, on the other hand, provide a dollar-for-dollar reduction in your tax liability and include credits for child and dependent care expenses and education expenses.
• Withholdings – Withholdings are the amount of taxes that are taken out of your paycheck by your employer throughout the year. The amount of withholdings is determined by your W-4 form, which you fill out when you start a new job. The goal is to have the right amount of taxes withheld so that you neither owe nor receive a refund at tax time.

Understanding how taxes are calculated and the different types of taxes can be a great help in managing your finances as a millennial freelancer or self-employed individual.

Take advantage of available deductions and credits, keep track of your income and expenses, and consider consulting a tax professional for additional guidance.

1.3 Tax brackets and rates

Tax brackets and rates are an important part of the tax system and can significantly impact the amount of taxes you owe. As mentioned earlier, tax brackets are used to determine your tax rate based on your income level. Here’s a breakdown of the federal income tax brackets and rates for 2023:

Table: Federal Income Tax Brackets for 2023

Note that these brackets and rates are subject to change by the government, so it’s important to check the latest information when filing your taxes.

It’s also worth noting that tax brackets and rates can vary by state.

For example, California has ten different tax brackets, with rates ranging from 1% to 13.3%, depending on your income level.

1.4 Tax deadlines and extensions

Tax deadlines can vary depending on your filing status and the type of taxes you owe.

As a millennial freelancer or self-employed individual, it’s important to stay on top of these deadlines to avoid penalties and interest charges.

Here are some important tax deadlines to keep in mind:

• April 15 – This is the deadline for filing your federal income tax return and paying any taxes owed.
• June 15 – If you’re a freelancer or self-employed individual, you may be required to pay estimated quarterly taxes. The second quarter estimated tax payment is due on June 15.
• October 15 – If you file for a tax extension, your tax return will be due on October 15. However, it’s important to note that an extension to file is not an extension to pay any taxes owed. You’ll still need to estimate and pay your taxes by the original April 15 deadline to avoid penalties and interest charges.

If you cannot pay your taxes by the deadline, you may be able to apply for an installment agreement or an offer in compromise.

These options can help you avoid penalties and interest charges, but they may also come with additional fees and requirements.

2. Deductions and Credits

2.1 Common Deductions for Freelancers and self-employed individuals

As a millennial freelancer or self-employed individual, there are several deductions you may be eligible for that can help reduce your taxable income and lower your overall tax bill.

Here are some common deductions to consider:

• Home office deduction – If you use a portion of your home exclusively for business purposes, you may be able to deduct expenses such as rent, utilities, and insurance.
• Health insurance deduction – If you pay for your health insurance, you may be able to deduct the cost of premiums.
• Business expenses – Any expenses directly related to your business, such as equipment, supplies, and travel expenses, can be deducted.
• Retirement contributions – Contributions to a retirement account, such as a traditional IRA or SEP-IRA, can be deducted.
• Self-employment tax deduction – You can deduct half of the self-employment tax you pay as an expense.

It’s important to keep accurate records and receipts to ensure you can properly claim these deductions on your tax return.

2.2 Tax credits available for Millennials

In addition to deductions, there are also tax credits available to millennials that can help reduce your tax bill.

Here are some credits to consider:

• Earned Income Tax Credit – This credit is available to low-to-moderate-income individuals and families and can provide a significant refund.
• Child and Dependent Care Credit – If you pay for childcare while working, you may be eligible for a credit to offset those expenses.
• Lifetime Learning Credit – If you’re pursuing higher education, you may be eligible for a credit to help cover tuition and fees.
• Retirement Savings Contributions Credit – If you contribute to a retirement account, such as an IRA or 401(k), you may be eligible for a credit to offset those contributions.

2.3 Importance of record-keeping for deductions

When it comes to deductions, proper record-keeping is crucial.

Keeping accurate records and receipts can help ensure you claim all eligible deductions and credits, and can also help you avoid penalties and interest charges in case of an audit.

Consider using a dedicated accounting software or app to help keep track of your expenses and income.

You can also keep physical copies of receipts and invoices organized in a designated folder or filing system.

By taking advantage of common deductions and tax credits and keeping accurate records, you can optimize your tax situation as a millennial freelancer or self-employed individual.

Don’t hesitate to consult a tax professional if you have any questions or concerns.

3. Estimated Taxes

3.1 What are estimated taxes

As a millennial freelancer or self-employed individual, you may need to pay estimated taxes to the IRS throughout the year.

Estimated taxes are a way to pay your tax liability on income that is not subject to withholding, such as self-employment income, rental income, or investment income.

These taxes are paid quarterly and are based on your estimated taxable income for the year.

3.2 When estimated taxes are due

Estimated taxes are due four times a year, with the following due dates:

• April 15th (for income earned from January 1st to March 31st)
• June 15th (for income earned from April 1st to May 31st)
• September 15th (for income earned from June 1st to August 31st)
• January 15th of the following year (for income earned from September 1st to December 31st)

It’s important to note that if you miss a deadline or underpay your estimated taxes, you may be subject to penalties and interest charges.

3.3 How to calculate and pay estimated taxes

To calculate your estimated tax payments, you must estimate your total taxable income and deductible expenses for the year.

You can use IRS Form 1040-ES to help calculate your estimated taxes.

Once you have calculated your estimated tax liability, you can pay your taxes online, by phone, or by mail using IRS Form 1040-ES.

You can also make estimated tax payments electronically using the Electronic Federal Tax Payment System (EFTPS).

To avoid underpayment penalties, it’s important to make sure you’re paying at least 90% of your estimated tax liability throughout the year.

You can also consider adjusting your estimated tax payments if your income or expenses change significantly during the year.

By staying on top of your estimated tax payments, you can avoid penalties and interest charges and ensure that you’re meeting your tax obligations as a millennial freelancer or self-employed individual.

Don’t hesitate to consult a tax professional if you have any questions or concerns.

4. Retirement Planning

4.1 Tax-advantaged retirement accounts

As a millennial freelancer or self-employed individual, planning for retirement is crucial to ensure a secure financial future.

One of the best ways to save for retirement is by using tax-advantaged retirement accounts, such as Individual Retirement Accounts (IRAs) and Simplified Employee Pension (SEP) plans.

IRAs allow you to contribute up to $6,000 per year (or $7,000 if you’re 50 or older) and receive a tax deduction for your contributions.

SEP plans, on the other hand, allow you to contribute up to 25% of your self-employment income (up to a maximum of $58,000 in 2021) and receive a tax deduction for your contributions.

4.2 How to calculate retirement contributions

To calculate how much you should contribute to your retirement accounts each year, you’ll need to consider your income, expenses, and long-term financial goals.

A good rule of thumb is to aim to save at least 10-15% of your income for retirement.

If you’re self-employed, you may also want to consider setting up a Solo 401(k) plan, which allows you to contribute up to $19,500 per year (or $26,000 if you’re 50 or older) as an employee and up to 25% of your self-employment income as an employer.

4.3 The impact of retirement savings on taxes

Contributing to tax-advantaged retirement accounts can have a significant impact on your taxes.

By contributing to these accounts, you can lower your taxable income and reduce your tax liability.

Additionally, the money you contribute to these accounts grows tax-free until you withdraw it in retirement.

For example, if you contribute $6,000 to a traditional IRA and you’re in the 24% tax bracket, you could potentially save $1,440 in taxes for the year.

Similarly, if you contribute $19,500 to a Solo 401(k) plan and you’re in the 24% tax bracket, you could potentially save $4,680 in taxes for the year.

It’s important to note that while tax-advantaged retirement accounts can help lower your current tax liability, you’ll still be subject to taxes when you withdraw the money in retirement.

Therefore, it’s important to have a plan in place for how you’ll manage your retirement withdrawals to minimize your tax liability.

By understanding the benefits of tax-advantaged retirement accounts and taking advantage of them, you can set yourself up for a more financially secure retirement as a millennial freelancer or self-employed individual.

5. Tax Preparation and Filing

5.1 Do-it-yourself tax preparation

As a freelancer or self-employed individual, you have the option to prepare and file your taxes.

There are several tax preparation software programs available, such as TurboTax and H&R Block, that can guide you through the process and help you file your taxes online.

One of the benefits of using tax preparation software is that it’s often more affordable than hiring a tax professional.

Additionally, these programs can help you identify deductions and credits you may be eligible for, reducing your tax liability.

However, it’s important to note that doing your taxes can be time-consuming and may require a significant amount of effort to ensure accuracy.

You’ll need to gather all of your financial documents, including receipts and invoices, and enter them into the software correctly.

Additionally, if you have a complex tax situation, such as multiple sources of income or investments, you may want to consider hiring a tax professional to ensure you’re filing your taxes correctly.

5.2 Hiring a tax professional

If you have a complex tax situation or simply prefer to have someone else handle your taxes, hiring a tax professional may be a good option for you.

A tax professional can help you identify deductions and credits you may be eligible for, ensure that your taxes are filed correctly and on time, and provide advice on tax planning strategies.

When hiring a tax professional, it’s important to choose someone experienced and knowledgeable about tax laws and regulations.

Look for a certified public accountant (CPA) or an enrolled agent (EA), who has passed a comprehensive exam and is authorized to represent taxpayers before the IRS.

Hiring a tax professional can be more expensive than preparing your taxes, but it can also save you time and potentially reduce your tax liability.

According to a survey by the National Society of Accountants, the average fee for preparing a tax return in 2020 was $261.

5.3 Common tax preparation mistakes

Whether you choose to prepare your taxes or hire a tax professional, it’s important to be aware of common tax preparation mistakes to avoid.

Some common mistakes include:

• Failing to report all income: As a freelancer or self-employed individual, you may have income from multiple sources. It’s important to report all of your income on your tax return to avoid penalties and interest.
• Misclassifying expenses: Make sure you’re classifying your expenses correctly to ensure you’re taking advantage of all available deductions. For example, office supplies and equipment should be classified as business expenses, while personal expenses should not be included.
• Forgetting to file for an extension: If you need more time to file your taxes, you can request an extension. However, it’s important to file for an extension by the tax deadline to avoid penalties and interest.
• Failing to keep accurate records: Keeping accurate records is important for both tax preparation and financial planning. Make sure to keep track of your income and expenses throughout the year to make tax preparation easier and more accurate.

By being aware of these common tax preparation mistakes and taking steps to avoid them, you can ensure that your taxes are filed correctly and on time, potentially reducing your tax liability and avoiding penalties and interest.

6. Tax Planning

Tax planning is an important aspect of managing your finances.

It involves organizing your financial affairs in a way that minimizes your tax liability while remaining compliant with the tax laws.

By proactively planning for taxes, you can potentially save yourself a significant amount of money over the long term.

6.1 Why tax planning is important

Tax planning can help you to:

• Reduce your tax liability: By identifying tax deductions and credits that you may be eligible for, you can reduce the amount of taxes you owe.
• Avoid penalties and interest: By ensuring you file your tax returns on time and accurately report your income, you can avoid costly penalties and interest charges.
• Improve your financial position: By minimizing your tax liability, you can keep more of your hard-earned money and use it to achieve your financial goals, such as paying off debt or saving for retirement.

6.2 Tax planning strategies for Millennials

Here are some tax planning strategies that millennials can use to reduce their tax liability:

• Maximize retirement contributions: Contributing to tax-advantaged retirement accounts like a 401(k) or IRA can lower your taxable income and reduce your tax liability. Consider contributing as much as you can afford to these accounts, particularly if your employer offers matching contributions.
• Take advantage of deductions and credits: As a self-employed individual or freelancer, there may be a range of deductions and credits available to you, such as the home office deduction, business travel expenses, and the Earned Income Tax Credit (EITC). Make sure you understand what you are eligible for and keep accurate records to support your claims.
• Plan for capital gains: If you invest in stocks, mutual funds, or other securities, you may incur capital gains taxes. Consider strategies such as tax-loss harvesting, where you sell losing investments to offset capital gains or hold investments for more than one year to qualify for long-term capital gains tax rates.

6.3 Importance of year-round tax planning

Tax planning should be a year-round process, not just something you think about when tax season rolls around.

By monitoring your income and expenses throughout the year, you can make adjustments to your tax strategy as needed and ensure that you are taking advantage of all available tax breaks.

It can also help you avoid any surprises at tax time and reduce the stress of scrambling to get your tax returns in order.

Bottom Line…

You’ve made it to the end of our guide on navigating taxes as a millennial freelancer or self-employed individual.

By now, you may have a good understanding of the tax system, deductions and credits, estimated taxes, retirement planning, tax preparation and filing, and tax planning strategies.

As a millennial freelancer or self-employed individual, taxes can be a daunting task, but they don’t have to be.

With the right knowledge, tools, and resources, you can confidently navigate the tax system and maximize your deductions and credits.

Remember, tax planning is not a one-time event; it’s a year-round process.

By consistently monitoring your income and expenses, keeping good records, and implementing tax planning strategies, you can minimize your tax liability and keep more of your hard-earned money.

Don’t be afraid to seek professional help if needed, and always stay informed of any changes in the tax laws that may impact you.

With a little effort and some smart tax planning, you can take control of your taxes and secure a brighter financial future.

Keep hustling and stay tax-savvy!