So you finally started a freelancing business. Perhaps you decided that office life isn’t for you, and you want to strike out on your own. Or maybe you prefer to live an unencumbered life. Regardless of your reasons, you are not alone. Upwork estimates that more than a third of the U.S. workforce does freelance work, whether part-time or as a full-fledged career.
And it’s easy to see why. You get to choose how and when you work, select your clients and projects, and most importantly, be your own boss. You are only accountable to yourself and the people you choose to work with.
But freedom comes with responsibility, and not even the self-employed are exempt from taxes. While regular employees have their taxes automatically deducted from their paychecks, freelancers are responsible for their tax obligations themselves.
Here’s everything you need to know about filing taxes as a freelancer.
The basics of freelancing and taxes
Whether you call yourself a freelancer or an independent contractor, it’s your job to figure out how much you’re going to pay and when.
Freelancer or self-employed?
The Internal Revenue Service (IRS) considers you self-employed if you meet one of the following conditions:
- You carry on a trade or business as a sole proprietor or an independent contractor.
- You are a member of a partnership that carries on a trade or business.
- You are otherwise in business for yourself (including a part-time business).
Simply put, if you freelance, you’re self-employed.
Freelancer taxes you need to pay
For starters, you will need to file an annual return if you earn $400 or more in a year. You are also required to pay estimated taxes quarterly. If you underpay or fail to pay your quarterly taxes, you may be subject to an additional fine.
The deadline for estimated taxes is the 15th of the month following the fiscal quarter:
- First quarter – April 15
- Second quarter – June 15
- Third quarter – September 15
- Fourth quarter – January 15
Freelancers are also responsible for paying a 15.3% federal self-employment tax to cover Social Security and Medicare contributions. Regular employees only pay half that amount, but since you’re working for yourself, you’ll need to cover the full cost.
Depending on where you live, you may also be on the hook for state and local income and self-employment taxes.
How do freelancers pay taxes
Instead of the standard W-2 form, freelancers receive Form 1099-MISC, Miscellaneous Income, from clients who pay $600 or more. A Schedule C attachment to your tax return is then used to declare payments for your services. Make sure to report all your income from self-employment, even from clients who didn’t send a Form 1099.
Use Form 1040-ES, Estimated Tax for Individuals, to calculate your quarterly taxes.
If you use an online payment system to receive income, you can request a Form 1099-K, Payment Card and Third Party Network Transactions, from the financial company.
Benefits of a tax professional
Since freelancers are expected to stay on top of their finances and tax obligations, they need to track every business-related transaction, including income and expenses. You stand to save a lot of time, money, and energy if they partner with a tax professional.
Unlike most employees, your financial situation may differ from month to month. And since you’re filing as a business, your tax return could become complicated.
Working with a tax service such as TFX also allows you to take advantage of tax benefits and deductions that you might not have known about.
With your freelancer tax obligations growing, it’s important that you take advantage of benefits and deductions to minimize your tax bill. You are entitled to claim deductions on expenses that are related to your freelancing business.
Freelancers who work from home can take a home office deduction. This allows you to claim costs such as your home power and internet bills, insurance costs, and other home expenses as a business expense. You may also deduct from your taxes the cost of setting up your office and new equipment and supplies.
The key to maximizing your deductions is good recordkeeping. Make sure to save every receipt in case the IRS wants to look at your records. You may be working for yourself, but you still need to prepare accurate financial records for your freelancing business.
Few freelancers have the time and energy to file their returns themselves. The tax code can be complicated, and filing a complete return takes time away from your work. Trust the tax experts to ensure a fast and accurate return.