Working for yourself as a freelance software developer has a lot of awesome perks: unlimited earning potential, the freedom to choose interesting projects from clients you enjoy working with, the power to carve your own schedule...but there are some downsides, too.
An obvious one? You’re required to invest more time and money into financial housekeeping, namely your taxes.
While you’d much rather spend time sharpening your developer skills, if you don’t stay on top of your taxes throughout the year, it could cause more stress and cost you more money down the line.
Here are some pointers for staying on top of your taxes when you’re a freelance software developer.
Freelance Tax Basics
When you work for yourself, you’re responsible for paying self-employment taxes, which are typically due every quarter. Self-employment taxes are made up of your FICA, or Medicare and Social Security taxes.
When you work for someone else, your employer pays half of these taxes and you're responsible for the other half. But when you work for yourself, you act as your own employer — meaning you'll need to pay the entire tax. In 2019, the FICA tax rate is 12.4 percent for Medicare plus 2.9 percent for Social Security, for a total of 15.3 percent.
This figure is in addition to any income tax you'll owe. While there’s no magic percentage as to how much you should save for each paycheck to cover your total tax bill, the general recommendation is to hold back 30 percent of your earnings. The more you can save, the better — some tax consultants recommend saving up to 50 percent.
Know Your Freelance Software Developer Deductions
Make sure to keep track of all business-related expenses you can deduct for your taxes. The more you can deduct, the lower your taxable income — and the less you’ll pay Uncle Sam.
For an expense to be deductible, it has to be considered necessary and ordinary. Necessary means that it’s an essential expense to run your business. So while you certainly need a computer and software to do your job, that tiki bar you use to entertain guests might be questionable.
Some common tax deductions if you’re a freelance software developer might include:
Mileage and car-related expenses. This could include trips to and from client meetings, professional mixers, or any onsite work you might perform.
There are two ways you can deduct mileage for your business. You can either use the standard deduction rate set by the IRS (currently $0.58 per mile), or keep a detailed record of your actual expenses including gas, maintenance, repairs, and insurance — as well as the proportion of miles you drive for your business vs. personal use.
Equipment and supplies. This includes your computer, software, and apps for your business.
Home office deduction. To qualify for a home office deduction, you’ll need to have a separate portion of your home that’s used solely for business purposes. So you can’t say your "home office" is the dining room table or couch.
If you do qualify for the home office deduction, you might be able to write off a portion of your utilities as well, such as electricity and internet.
Business travel. Any travel you do for business purposes could potentially be written off.
Professional mixers and memberships. Memberships to professional organizations and costs related to professional events can also be tax deductible.
Stay on Top of Bookkeeping
Ideally, you’ll want to stay on top of your bookkeeping and adhere to daily, weekly, and monthly tasks to keep strong records. For example, a daily task might be to compile reimbursable expenses and billable hours. A weekly task would be to send reminders about outstanding invoices, send invoices, and record and reconcile financial transactions. Monthly to-do items might include creating financial reports and tracking your goals.
Paying for cloud accounting software is certainly worth looking into, and you might also want to hire a bookkeeping service to help you balance your books. A tax consultant can help you with tax management and tax-saving strategies. While these things cost money, remember that this is an investment that could save you time and money while helping you run an efficient, successful business in the long run.
Make the Most of Your Tax Advantages
Besides maximizing your tax deductions, consider looking into other tax-saving strategies. For instance, setting up your business as a pass-through entity can help lower the taxes you owe, since you won't be taxed at the corporate level — your tax burden will simply “pass through” to your individual return.
Examples of pass-through business entities include sole proprietorships, partnerships, LLCs, and LLCs with an S Corporation tax election. In the case of the S Corporation election, you could save on your self-employment taxes too — learn more with our S Corp Tax Calculator.
Consult With a Tax Professional
Among a sea of freelance software developers, your tax situation might be vastly different than a colleague’s depending on where and how you operate. If you need help on how to best to manage your taxes, speak to a tax consultant who can help you with specific tax strategies for your business of one.
You can also utilize Incfile’s Business Tax Research page to learn more about which entities offer the best tax advantages and how to maximize your tax advantages.