5 IRS Rules Freelancers Forget Exist, Only To Regret It Later
As a freelancer, you need to remember a lot of information, from deadlines to client preferences (heaven forbid you give that one client anything in cornflower blue). Still, letting certain IRS rules slip through the mental cracks could prove a costly mistake — one you’ll very much regret later.
To help you avoid making this mistake, MoneyLion rounded up a list of IRS rules that freelancers should keep in mind every tax season. Write them down if you have to. Send them to yourself in a voice note. Whatever you do, don’t forget them.
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1. Pay Your Estimated Taxes
Do you have a hefty chunk of change to give the government in April? If you don’t regularly plan for it, then you really don’t want to miss paying your quarterly estimated taxes. People who expect to owe $1,000 or more in federal taxes for the year generally need to make quarterly payments.
Plan on sending Uncle Sam some money on April 15, June 15, Sept. 15 and Jan. 15 of the following year, or the next business day if the 15th falls on a weekend or holiday.
Forget to make these quarterly estimated payments, and you could be hit with a large tax bill all at once, not to mention penalties and interest assessed by the IRS.
2. You Can Make a Self-Employed Health Insurance Deduction
If you’re a full-time freelancer, you probably pay for your own health insurance. And if you do, TurboTax reminds you that you can likely claim a deduction for the full cost of your premiums — as long as you’re not eligible for employer-sponsored coverage through your own job or a spouse’s employer.
In case you did forget about this deduction, let the TurboTax team explain it:
“The policy needs to be in your name or in the name of your business. This deduction isn’t entered on your Schedule C — it’s an adjustment to your income that you report on Schedule 1, Part II of your tax return.”
3. The Hobby Loss Rule Can Increase Your Tax Burden
You just know that you can get your business selling vintage clown figurines on Etsy to be a powerhouse in the next few years. The IRS, unfortunately, won’t necessarily share your enthusiasm if your business hasn’t turned a profit in at least three of the last five tax years.
The agency distinguishes between a legitimate business and a hobby using what’s often called the “hobby loss rule” or the “three-out-of-five” rule. In short: If your business turns a profit in at least three of the past five years, the IRS generally presumes it’s operated for profit.
If it doesn’t meet that threshold, the IRS may treat it as a hobby, which means you must still report the income but generally can’t deduct business expenses. That limitation can dramatically increase your tax burden.
4. You Must Report All Your Income
Writing for TheStreet, journalist Damilola Esebame offered advice for a new breed of full-time freelancer — the self-employed content creator. Still, his reminder to follow IRS income-reporting rules applies to all freelancers, regardless of industry.
“Your tax obligation covers far more than just direct payments from platforms or brands,” he said. “The IRS expects you to report every stream of creator income, and the list is broader than most people realize.”
Even if you’re not getting paid big bucks for a major brand collab and are instead receiving Venmo payments for pet-sitting, that money is still taxable income in the eyes of the IRS. And unless you enjoy the idea of being on the agency’s bad side, it’s best to report it all.
5. The Home Office Deduction Is Only for Business
You might do your best work on your kitchen table, but if that’s also where you watch the big game or gossip with friends, you can’t claim it as a home office for tax purposes.
Though the home office deduction is valuable, it’s often misunderstood, to freelancers’ detriment. Here’s what to remember: The space you claim must be used regularly and exclusively for business purposes. While that kitchen table doesn’t qualify, a dedicated room or clearly defined workspace used only for work can.
The Bottom Line
When you’re juggling client interests and tracking your payments, it’s easy to let certain information slip your mind. But if you make a point to remember these IRS rules, filing your taxes — and dealing with the IRS — can be far less stressful.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal, or tax advice.
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