Tax Disputes
These are disagreements between a taxpayer and a tax authority, such as the IRS, over the amount of tax owed or other aspects of the tax return. Freelancers may engage a tax professional to assist in resolving disputes.
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Tax Exemptions
These are amounts that reduce taxable income. The term is a little outdated, as personal and dependent exemptions were eliminated by the Tax Cuts and Jobs Act in 2017, but some taxpayers may still qualify for certain other types of exemptions.
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Tax Credits
Tax credits reduce the amount of tax owed, dollar for dollar. They're more beneficial than deductions, which only reduce the amount of income subject to tax. There are various tax credits freelancers may be eligible for.
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Tax Deadlines
These are the dates by which certain actions must be taken for tax purposes, such as filing returns or making payments. For instance, the deadline for filing individual income tax returns is generally April 15th.
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Tax Filing Software
This is software designed to assist in preparing and filing income tax returns. It can be particularly helpful for freelancers, who often have more complex tax situations than traditional employees.
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Accounting Software
This is software that helps manage financial transactions. For freelancers, it can assist in tracking income and expenses, invoicing, and preparing for tax filing.
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Retirement Plan
A retirement plan is a financial arrangement designed to replace employment income upon retirement. Freelancers may opt for individual retirement accounts (IRAs) or a solo 401(k), among other plans.
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Health Insurance
This is coverage that pays for medical and surgical expenses incurred by the insured. Freelancers, not having employer-provided insurance, must typically obtain their own health insurance, the premiums of which can often be deducted from their taxes.
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Medicare
Medicare is a U.S. federal program that provides health coverage for people aged 65 or older or with certain disabilities. Freelancers contribute to this program through their self-employment tax.
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Social Security
Social Security is a federal program in the U.S. that provides benefits for retirement, disability, and survivorship. Freelancers contribute to this program through the self-employment tax.
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Payroll Taxes
Payroll taxes are taxes withheld from an employee's salary and paid directly to the government by the employer. They fund Social Security and Medicare. As freelancers are not employees, they instead pay self-employment tax, which functions similarly.
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Tax Withholding
Tax withholding refers to the amount of an employee's pay withheld by the employer and sent directly to the government as partial payment of income tax. Freelancers, being self-employed, do not have taxes withheld and must estimate and pay these themselves.
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Net Operating Loss
A net operating loss (NOL) occurs when a business's tax deductions exceed its taxable income within a tax period. This can be carried forward or back to offset taxable income in other years, reducing future or past tax liabilities.
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Independent Contractor
An independent contractor is a person or business that provides goods or services to another entity under terms specified in a contract. Unlike employees, they're not subject to tax or benefit withholding, and instead must manage their own taxes.
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FICA Taxes
FICA stands for Federal Insurance Contributions Act. These are payroll taxes paid by both employees and employers to fund Social Security and Medicare. Self-employed individuals, like freelancers, are responsible for the entire FICA tax amount, but can deduct the employer-equivalent portion.
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Sole Proprietorship
A sole proprietorship is a type of unincorporated business that is owned and run by one individual. For tax purposes, most freelancers are considered sole proprietors unless they've formed a business entity like an LLC or corporation.
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Home Office Deduction
This is a tax deduction that freelancers can take if they use a part of their home regularly and exclusively for business purposes. The deduction can include a portion of your costs for rent, mortgage interest, utilities, and more.
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Tax Liability
Your tax liability is the total amount of tax on your income that you need to pay to the tax authority. For freelancers, this can include income tax and self-employment tax. The amount of tax liability will depend on the freelancer's taxable income and tax rate.
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Self-Employment Deductions
Self-employment deductions refer to business-related expenses that can be subtracted from your self-employment income to reduce your tax liability. This includes expenses such as office supplies, business use of a home or car, health insurance premiums, and others.
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Taxable Income
Taxable income is the amount of income that is actually subject to taxation, after all personal exemptions and deductions are factored in. For freelancers, this would be their total income, minus any business expenses and relevant deductions.
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W-2 Form
The W-2 form is a tax document that employers send to employees and the IRS. It reports an employee's annual wages and the amount of taxes withheld from their paycheck. Freelancers generally do not receive W-2 forms, instead they receive 1099s from their clients.
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Estimated Taxes
Estimated taxes are payments made to the IRS and state tax agencies on income that is not subject to withholding. For freelancers, this typically includes income from self-employment, interest, dividends, rent, and more. These are usually paid quarterly.
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Schedule C Audit
A Schedule C audit is an IRS examination of the Schedule C form used to report profit or loss from a sole proprietorship. The audit reviews the income and expenses reported, and checks the record keeping practices of the freelancer.
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Tax Penalties
These are fines imposed by the IRS if you fail to file your taxes, pay taxes, or make errors on your tax return. For freelancers, this could include failure-to-file or failure-to-pay penalties, as well as penalties for underpayment of estimated tax.
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Freelance Income Reporting
Freelancers must report all income earned to the IRS, regardless of whether they receive a 1099 form or not. This includes income from gigs, cash payments, and barter transactions.
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Mileage and Travel Expenses
These are costs associated with using a vehicle for business purposes or traveling for business. Freelancers can deduct these expenses when they are ordinary and necessary for their business.
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Tax Preparer
A tax preparer is a professional who is authorized to prepare, file, and sign income tax returns on behalf of individuals and businesses. They can help freelancers navigate the complexities of their tax situation.
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1099 Tax Brackets
These are the federal income tax brackets that apply to the taxable income of freelancers. They range from 10% to 37%, depending on income level. Unlike W-2 employees, freelancers must also consider self-employment tax.
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Freelancer vs Employee Taxes
The main difference lies in who is responsible for withholding and paying taxes. Employers withhold taxes for employees, while freelancers are responsible for calculating and sending their own taxes. Freelancers also pay the full amount of Social Security and Medicare taxes, while these are split between employees and employers.
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Negative Freelance Income
If your business expenses exceed your business income for the year, you may have a negative net income from your freelance work. In this case, the loss may be used to offset other income.
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Expense Reimbursement
Expense reimbursments are used when you're repaid for business expenses you've paid out-of-pocket. For freelancers, if a client reimburses you for an expense, it typically doesn't count as income.
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Self-Employment Income
Self employment income is income earned from a trade or business that you run, typically reported on Schedule C. It includes income from freelancing.
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LLC
A Limited Liability Company (LLC) is a business structure that can provide freelancers with liability protection. This means that personal assets usually can't be used to satisfy business debts or liabilities.
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Tax Audit
A tax audit is a review of an individual's or organization's tax return by the IRS to verify that income and deductions are accurate. It's relatively rare for freelancers but can be triggered by various factors like high income or large deductions.
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Tax Write Off
A tax write-off refers to a legitimate expense that can be deducted from taxable income. Freelancers can write off a variety of business expenses, such as home office expenses, supplies, and travel.
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Unreported Income
This is income that a person or business receives but doesn't report to the IRS. It's illegal and can lead to penalties, interest, and possible criminal prosecution.
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Schedule C
This is an IRS form that sole proprietors (and some LLCs) use to report income or loss from a business. Freelancers usually file a Schedule C.
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QBI Deduction
The Qualified Business Income (QBI) deduction is a tax deduction for eligible small businesses and self-employed individuals (including freelancers). It allows you to deduct up to 20% of your qualified business income from your taxable income.
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1099 Form
This is a series of IRS documents used to report various types of income other than wages, salaries, and tips. For freelancers, the most relevant are 1099-NEC and 1099-MISC.
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Quarterly Taxes
Since freelancers don't have taxes automatically withheld from their pay, they may be required to pay their estimated tax liability quarterly to the IRS and state tax agency if applicable. This is known as paying quarterly taxes.
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Business Expenses
These are costs incurred in the ordinary course of business. Freelancers can deduct business expenses that are necessary and ordinary, such as office supplies, software subscriptions, or professional development costs.
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Self-Employment Tax
This is the tax paid by individuals who work for themselves, such as freelancers. It's similar to the combined employee and employer portion of the Social Security and Medicare tax that employees pay.
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Bookkeeping
For freelancers, bookkeeping involves keeping track of income and expenses to accurately report them to the IRS. Good bookkeeping can help with tax deductions, avoid audits, and provide an accurate view of the financial health of the freelance business.
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1099-MISC
1099-MISC is a variant of Form 1099 used to report miscellaneous income. This could be for services rendered by someone who is not an employee, rent payments, prizes, medical payments, and more. It's used for amounts less than $600.
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1099-NEC
The 1099-NEC form is an IRS tax form used by businesses to report payments of $600 or more made to independent contractors or freelancers. It replaced box 7 on the 1099-MISC form for reporting nonemployee compensation starting from the tax year 2020.
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