Oh joy! Tax season is here. It’s time for you to figure out if Uncle Sam is about to cut you a fat refund check or if you owe a Wesley Snipes amount of back taxes. Whatever your situation is, this article will answer some of the frequently asked questions I’ve gotten from digital nomads looking to file for the first time as a self-employed professional.
However, before we push on, I want you to keep in mind that even though I’ve been filing my own taxes for about a decade and have a pretty good understanding of the laws in place, I’m not an accountant. Therefore, if you’re really unsure about the tax law as it pertains to you or your business, I suggest consulting a professional. I’ve also littered this article with links so that you can read more about the topics I touch on here.
Please note: 45’s Tax Cut does not affect the filing of your 2017 taxes. The Tax Cut and Jobs Act, which was signed into law on December 22, 2017, will affect the filing of your 2018 taxes, which means we have a little time to figure out and fully comprehend what the heck is going on with all that.
1. Which form do I use?
Well, that depends on what kind of entity you are. See below:
Sole proprietor: If it’s just you and you haven’t incorporated, then the amount of money you made or lost freelancing is reported on your individual tax form, which is the 1040 Form or Form 1040EZ if you qualify.
Single-Member Limited Liability Company (LLC): If it’s just you and you decided to incorporate to take advantage of those tax benefits, then your business’s profit or loss is still reported on your individual tax form (1040 Form).
Limited Liability Company (LLC): If you started an LLC with other people, then you have a choice of being taxed as a S Corporation (File a Form 1120-S) or partnership (File a Form 1065), either way that income or loss would be reported on your individual tax form as well (Form 1040).
S Corporation: If you decided to file as an S Corporation, then you have to file a Form 1120-S. However, all partners of the corporation are required to report that info on their individual tax returns (Form 1040).
2. What’s the deal with this “pass through” tax?
Pass through taxation is just a fancy way of saying that as an individual owner of a business you can apply the profit or loss from your business onto your individual tax returns. To calculate the net profit or loss of your business, simply subtract your business expenses from your net income. If the number is positive, then record it as a profit on Schedule C (or Schedule C-EZ if you qualify) of your Form 1040. If the number is negative, then you might be able to record the loss as a deduction.
3. How do I apply the self-employment tax to my individual tax return?
Since you’re self-employed, you do have to apply the 15.3% self-employment tax to your return. This means that you have to file a Schedule SE with your Form 1040 to cover the Medicare and Social Security taxes you owe. For future reference, you have the option of paying this tax quarterly rather than annually by filing a Form 1040-ES.
If you have ever been employed by a business you might have noticed that the company in question shouldered half of that 15.3% while the other half was automatically deducted from your check. Currently, you can deduct the employer-equivalent amount from the self-employment tax you owe, thereby cutting the amount owed for said tax in half. (Yay!)
4. Should I claim a personal exemption or standard deduction?
Well, that really depends on your filing status. I would suggest comparing the personal exemption and standard deduction charts and information to make a decision. Personally, my filing status is “single” and I have no dependents, so taking a standard deduction works best for me.
5. What about claiming other deductions (e.g., donations, student loans, retirement contributions, health care, etc.)?
Here’s where being a sole proprietor LLC or S Corporation comes in handy because you’re still able to deduct business-related expenses from your taxable income. That means that all the supplies you brought for your home office, and even the money you shelled out for plane tickets and accommodations when you were staying in New York to meet with clients (and do some sightseeing!) can be deducted from your taxable income. All you have to do is list these expenses when calculating your net profit or loss your Schedule C.
However, if you’re still a sole proprietor who hasn’t incorporated, do not fret! You can still take advantage of some deductions. The following deductions can be listed on Schedule A of the Form 1040:
- Charitable Donations – Non-cash donations are valued at their fair market value, which means that the gently worn clothes and furniture you donated to Goodwill can be deducted. Just make sure you attach that itemized list the organization gave you signing off on your donation. Cash donations can also be listed here with proof of payment from the charitable organization to which you donated.
- Student Loans – Yep, you can deduct the student loan interest you paid in 2017. Praise.
- Retirement Contributions – If you have a Traditional IRA you can claim contributions made in 2017 on your form.
- Health Care – You can take advantage of the self-employed health insurance deduction if you paid for health insurance coverage during the year. You can also deduct medical expenses that exceeded 7.5% of your adjusted gross income (AGI).
- Home Office – For digital nomads this deduction will not be an option given that you’re moving from place to place and, therefore, do not have exclusive, regular use of a home office. However, for freelancers who do work primarily from home, I suggest looking into claiming this deduction if you’re eligible.
- Moving Expenses – If you moved to a new location to begin a new job, you could be eligible to deduct those moving expenses. Just make sure you check to see if you qualify before filing a Form 3903.
6. How do I show proof of the income I’ve earned?
If you’re primarily self-employed, chances are you do not have a W-2 form that shows how much you earned via an employer. Therefore, you have to show proof of your income in other ways. If you use online platforms, such as Upwork for work, you can easily pull documents that show payments made for services rendered.
For offline clients, I find using websites and programs, such as Paypal to be a great way to invoice clients and show proof of payment for services rendered through easy-to-pull documents that show the details of every transaction. If you don’t use freelancing platforms, websites, or programs for every transaction, then you can always pull bank statements to use as proof.
7. What if one of my jobs gives me a W-2 Form?
If one of your jobs has a W-2, then dope! It makes calculating your taxable income that much easier. All you have to do is attach a copy to your Form 1040 and make sure to incorporate the taxable income when calculating your adjusted gross income (AGI).
Furthermore, you also have the option of increasing the amount of taxes withheld from each paycheck to help shoulder some of the taxes you will have to pay on the income earned through other revenue streams. You can do this by filling out another W-4 form from your employer and inputting a dollar amount for how much additional money you would like withheld from each paycheck.
8. When’s the last day to file my individual income tax return?
April 17, 2018 is the last day to file your federal tax return for 2017. Deadlines for filing state income tax returns vary, so make sure you look up the deadline for your state. Try to file on time to avoid tax penalties. If you find yourself needing extra time to file your individual tax return, look into getting an extension by filing a Form 4868 instead of the Form 1040 before that April 17th deadline.
Doing your own taxes can feel pretty daunting given that the forms you need to file along with their respective instructions are laden with intimidating financial jargon wrapped up in complicated run-on sentences. However, it is possible! Doing your own taxes is a great way to understand your spending and investment habits.
To avoid making a post of epic proportions I definitely didn’t cover every tax-related question. Therefore, if you have any other tax-related questions you would like answered please leave them in a comment below!