Taxes for Freelancers
6 min read •
30 sec brief
Freelancing can be a dream, and for many it is. Some of the perks include picking your hours and choosing projects you’re passionate about. With all the advantages, its vital to realize that you’ll have to take care of many things your employer used to, such as taxes. Here are a few key points to…
Freelancing can be a dream, and for many it is. Some of the perks include picking your hours and choosing projects you’re passionate about. With all the advantages, its vital to realize that you’ll have to take care of many things your employer used to, such as taxes.
Here are a few key points to know about taxes as a freelancer.
Keep Track of Your Freelance Income
There are many ways to track your freelance income, from paper and pen to accounting software; the important part is to keep up with the numbers.
Every client who pays you $600 or more in a year should send you a 1099-MISC form. This form summarizes the income you received from that client.
Many clients now use online payment systems to pay freelancers. You’ll likely receive a 1099-K if you’re paid online. However, there is a catch; clients don’t have to send a 1099-K unless they pay you over $20,000 or more than 200 times. This means it’s super important to track your income carefully, as you still have to report your earnings on a Schedule C form.
A Schedule C tax form is where you’ll report your freelance income and expenses. In Part I, you’ll report all your freelance income you earned that tax year, including amounts from the 1099 forms and all other freelance earned money. In Part II – V, you list your business expenses to see if you can claim any deductions.
Be sure to find a tax professional to help walk you through this process.
What is the Self-Employment Tax?
If you make $400 or more in any year from freelance work, you are required to pay the self-employment tax of 15.3 percent.
Self-employment means you are considered both the employer and employee. This 15.3 percent covers 12.4 percent for social security and 2.9 percent for Medicare insurance. Typically, as an employee, the employer covers half this tax, and they directly deduct your portion before you get your paycheck. When your freelancing, it’s up to you to cover this tax.
You can use Schedule SE tax form to help calculate your self-employment tax, and report that on your standard Form 1040. You may be able to deduct the employer portion (50 percent) of your self-employment tax on your 1040.
It’s important to remember that the self-employment tax is above and beyond your regular income tax. You’ll want to set aside money to make sure you can cover your self-employment tax when tax season comes. Some financial experts recommend up to 35 – 40 percent of each freelance check.
What is Estimated Tax and Should You Pay It?
The IRS allows you to estimate taxes for the year and pay every three months in four equal installments, known as an estimated tax. If you think you’ll owe $1,000 or more in taxes, paying quarterly tax will help ensure you don’t get an unwanted shock at tax time.
Each year is split into four payment periods. Here are the deadlines for each period:
- January 1 – March 31 (April 15 deadline)
- April 1 – May 31 (June 16 deadline)
- June 1 – August 31 (September 15 deadline)
- September 1 – December 31 (January 15 of following year deadline)
If freelancing is more of a side-gig in addition to your day job, you may not have to make the quarterly payments. Many freelancers make less than $2,000 a year, so if this sounds like you, you can report your freelance income when you file your tax return for your regular position.
If you’re a full-time freelancer, and it looks like you’ll owe more than $1,000 in taxes, consider paying the estimated tax installments during the year. This will ensure you’ve made your tax payments when its time to file. Form 1040-ES can help you determine your estimated earnings and taxes. Remember, this is an estimate, so if you’re under, you’ll still owe the remaining taxes, but if you’re over, you’ll get it back via a refund.
Deductions Freelancers Can Claim
There are several deductions for freelancers to claim. Deductions lower your taxable income, which typically reduces your tax bill, so a win-win.
According to the IRS, freelancers can claim deductions for expenses that are “ordinary and necessary” to run your business.
Here are a few examples:
- Advertising and marketing
- Computer equipment and software
- Home office
- Office supplies
Be certain the expenses you deduct are related to your business and not personal. By keeping original receipts and invoices, and carefully documenting other expenditures, you can prove the expenses were for your business and save money at tax time. You may want to open a separate checking and savings account for your freelance income. This helps keep everything separate, making record keeping easier.
In addition, there are other tax tricks for freelancers to take advantage of. For example, see if you qualify for the Earned Income Tax Credit, a refundable credit that cuts taxes for those with a low-to-moderate income. Always consult with a tax professional to see if there are other tax tricks you can utilize.
Once you’ve figured out your tax plan, you can check taxes off your list of things to do!
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