If you’re wondering, “Do freelancers pay taxes,” the answer is a resounding, “Yes!” And, today’s the tax filing deadline.
I started doing my taxes yesterday and foolishly thought I’d be able to finish them by devoting a whole day to it. Not! I started late (which is another story), but once I did get started, I spent most of the day categorizing payments/refunds/fees from my PayPal account. That’s what inspired this “PayPal Tax Tips” for freelance writers post.
In case you don’t know, this is the first year that PayPal will report your earnings to the IRS. PayPal explains how/why on their site, stating:
Starting in 2011, Internal Revenue Code (IRC) Section 6050W states that all US payment processors, including PayPal, are required by the Internal Revenue Service (IRS) to provide information to the IRS about certain customers who receive payments for the sale of goods or services through PayPal. These new rules apply to sellers who receive over $20,000 in gross payment volume AND over 200 separate payments in a calendar year.
Learn more about PayPal tax requirements.
FYI, you should have been reporting your PayPal earnings all along (you were, weren’t you?). It’s just that now, if you don’t, good ole Uncle Sam has a way to track it.
As I was going through my PayPal account printout yesterday, following are a few things I wanted to share that will make filing taxes easier for freelance writers.
PayPal Tax Tip #1 for Freelance Writers: Download Monthly Statements
PayPal generates monthly statements for you (see graphic below for where to click to get your PayPal statements). But they are only available for the latest three months. So, be sure to download them every month (or every three months) so that you can have them at your fingertips when it ‘s time to file.
I had to go back and manually print out my PayPal account activity for last year and it took for friggin’ ever because a lot goes on in my PayPal account on any given day, as the following graphic illustrates.
PayPal Tax Tip #2 for Freelance Writers: Itemize Statements Monthly (or at Least Quarterly)
What I mean by this is, when you print out your monthly statements – whether you do it monthly or quarterly – go through them and itemize your expenses/payments. Calculate them and put them in a spreadsheet (eg, web expenses, PayPal fees, payments to affiliates, payments from clients, refunds, sales, etc.).
This way, you’re not stuck doing it for the whole year at the end of the year like I did yesterday. Boy, what a pain that was. It’s easy, it’s just painstaking and it takes so much time (and you’re more prone to make errors) when you do it at the last minute. This is why I spread my taxes out over two days this year (yesterday/today) instead of trying to finish them in one day.
I could have finished, but I didn’t want to risk mistakes, so I just did the organizing yesterday and the actual entering of the data today. I use TurboTax, which makes doing taxes yourself really easy (and cheap!).
FYI, I have no affiliation with TurboTax; I’m just a happy user.
Tax Organization Tip: Freelance writing expenses tend to be pretty fixed, eg, web hosting fees, PayPal fees, bank fees, online marketing fees, etc. So, create a spreadsheet and fill in these expenses regularly when you download your monthly PayPal report.
This way, you can just plug them into the appropriate categories on your tax form when the time comes.
PayPal Tax Tip #3: Don’t Forget “Other Than PayPal” Income and Expenses
Eighty to ninety percent of my annual income and expenses can be tracked via my PayPal account. As of this writing, 100% of my clients pay via PayPal and most of my expenses come out of this account as well.
But, some of my ebook and internet marketing income and expenses are deducted from a checking account I use for my business, eg, Clickbank payments, Amazon ebook sales, Google minisite income. So, don’t forget to download and itemize income and expenses that come from other accounts as well.
While it’s unlikely you’ll forget the biggies, if you only made a few sales via Clickbank for example and that went to a checking account, then you could easily forget to add this into your annual income figures.
You don’t want to have to pay hundreds (or thousands) of dollars in back taxes a few years down the road for a few dollars you forgot to account for on one year’s taxes (it can take the IRS a few years to catch stuff sometimes, but if you owe them, trust me, you will eventually be billed for it).
Learn more about how not being organized can cost you years later in back taxes.
Extension of Time to File Taxes Form
If you know you won’t complete your taxes before the deadline, no need to worry, you can file an extension, which will give you another six months to get your taxes done. But you need to file Form 4868 with the Internal Revenue Service (IRS). Access the Application for Automatic Extension of Time To File U.S. Individual Income Tax Return form. The PDF form is directly from the IRS’ website.
Please note the mailing addresses in the instructions included with the form. If you’re making an estimated payment with your extension filing, you will use one address; if you are simply sending in the form with no payment, you will use another address, so look at that area carefully in the instructions.
Speaking of making estimated payments, please note, filing extension gives you more time to get your paperwork in order. Filing an extension does not give you more time to pay your taxes if you owe. If you owe, that amount is still due today. If you don’t have an exact figure, pay an estimated amount.
Tax Tips for Freelancers about Making Estimated Payments
I found these websites helpful for estimating tax liability (Line 6 of Form 4868). The calculators are very basic, but they will give you a gauge showing how much you think you’ll owe (assuming you’ll owe) as your tax liability:
Tax Liability Calculators: Learn How Much You’re Likely to Owe in Taxes at the End of the Year
E-File Your Tax Extension Form – Free!
There are several sites available from which to e-file. Start with the IRS’ e-file tax extension. Make sure you choose the FREE options.
Free Tax Help for Freelance Writers
If you have any questions, please consult a tax professional, or call the IRS directly at the numbers below.
Toll-free IRS tax assistance line at the following numbers: 800-829-4933 (for business tax questions); and 800-829-1040 (for individual tax questions).
Also, you can visit this federal government page for more free IRS / tax help.
Already Filed Your Taxes? Want to Know When Your Refund is Coming?
If you’ve already filed, learn when to expect your tax refund. The IRS will tell you your refund status after a few clicks.
DISCLAIMER: Please note, I am by no means a tax professional and do not intend the information dispensed here to be taken as professional tax advice for freelancers. I’m simply passing these PayPal tax tips (and other tax info) along in hopes that it can make filing your taxes easier – if not this year, then definitely in future years. Freelancing and taxes touch on a lot of grey areas, so never hesitate to consult a tax professional.
Learn more about freelancing and taxes in the related posts below.
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