Tracking and paying taxes is one of the most confusing parts about getting started in any freelance field, including online teaching. Here is a general guide for how to track and pay your taxes as an online teacher. Always refer to the IRS for specific situational questions, but this guide should give you a basic understanding of what needs to be done, when it needs to be done by, and what can help you get it right.
General Income Taxes
Online teachers, like freelancers in general, typically have income coming in from several different sources. It’s important to track all income, and I find it helps to do it all in one place. This way, your monthly bank statements can reflect all money coming in, and out, as related to your business.
In most circumstances, your clients will issue you a 1099-MISC form. If you’re affiliated with an established online teaching site, or other entity that handles paying you, this will be mailed to you following each business year. 1099-MISC are an earnings statement per client, and make it simple to calculate how much tax you owe based on that income.
- Open a business checking and savings account. Have all income from freelance work deposited into the checking account. Save money for taxes in the savings account. Services such as Track and automatically withhold your estimated tax allocations and deposit them into the savings account for you, if you’re having trouble holding yourself accountable.
- Automatically set aside 25% of your freelance income for taxes. While you may not need all of that money come tax time, it’s better to be safe than sorry (plus, you’ll have an excuse to treat yourself if there’s extra money left over after filing).
The next thing we’ll discuss here is self-employment tax. US citizens who earns freelance income of more than $400 per year, or income resulting in issuance of a 1099 form, must pay the self-employment tax. As of 2015, the tax rate is 15.3% for the first $118,500 of self-employment income.
This tax covers Medicaid and Social Security, and is similar to the withholdings from a typical employee paycheck. To pay this tax, file Form 1040 with the IRS. This rate may seem high – that is because it also covers the employer portion of the tax in addition to the worker, since as a contractor/freelancer you basically serve as both.
Tax services like Turbo Tax will automatically calculate this tax for you when using their software. I highly recommend using a service like this, or having an accountant ensure you are paying the correct amount. The IRS website goes into detail on this tax, what it covers, and specifics on filing.
As an online teacher, you will likely accumulate expenses. This is a good thing – expenses can pay off big time come tax day. It’s important to keep receipts. I find it helpful to take a quick photo of them on my phone and then store the receipt photos in a folder on Google Drive. Typical expense categories include:
- Physical items needed for your lessons.
- Food/drink/other items bought during networking or events.
- Home-office space, supplies, and utilities. This is a biggie – likely, you can write off a portion of your rent/mortgage, utilities, and internet costs as related to your business. The IRS website goes into great detail on this, but a general rule of thumb is that the deduction percentage is based on how much of that service/thing is used for your business. If 400 sq. ft. of your 1200 sq. ft. home is used as your home office, you can only deduct up to 1/3 of your rent/mortgage. It’s also important that that space only be used as a home office. If it doubles as your bedroom, you may run into some issues.
- Mileage, gas, and other travel expenses, if you have any.
Filing Quarterly Taxes
This is often the most confusing part. First things first: you need to file quarterly estimated taxes if:
- You owe over $1,000 in freelance taxes for the previous year, are still freelancing, and will likely owe over $1,000 this year. If this is your first year of freelancing, you’re good to go for now – file normally on April 15.
- This holds true for those who started freelancing in the middle of last year, for example. That counts as your first year, so no need to file quarterly for that year.
The form you need to file is Form 1040-ES, and here are the due dates:
- For income received Jan. 1 through March 31, estimated tax is due April 15.
- For income received April 1 through May 31, estimated tax is due June 15.
- For income received June 1 through Aug. 31, estimated tax is due Sept. 15.
- For income received Sept. 1 through Dec. 31, estimated tax is due Jan. 15.
It actually feels pretty good to file quarterly, once you get in the swing of things. It helps you stay on track with taxes, not have to hold thousands of dollars throughout the entire year, and I find it helps me to feel productive and accomplished, in some weird way.
How much do I need to pay?
It isn’t incredibly important to be smack-on-the-money with your estimated taxes. Base it on your previous year’s earnings and what you think you’ll make this year. Walk yourself through the steps on the Form 1040-ES, or hire an accountant/tax service to do it for you. The basic formula is that you pay the IRS ¼ of 90% of last year’s tax burden. That’s right- not 100% for the quarterly estimates. Calculate last year’s burden, multiply it by .9, and pay ¼ of that amount. This should be a general guideline for how to track and pay your taxes.