How Tax Works When You’re a Freelancer: 7 Things to Know
Many self-employed U.S. workers and freelancers need help calculating their earnings and expenses in every tax season. However, filing taxes can be easier when you do it yourself, yet that process requires some knowledge of tax law and a disciplined approach.
The good news is that you don’t have to be a CPA to figure out how to do taxes as a freelancer in the United States. This explainer guide will describe a few fundamentals and must-know things about freelancer taxes so you can confidently file your taxes and keep more money in your pocket.
Freelancer Tax: Basic Considerations
Freelancers, self-employed workers, consultants, independent contractors, and others who have to file their taxes have a few options for preparing the necessary paperwork and filing the information for the IRS (The Internal Revenue Service).
Remember that an annual tax return by April 15 is required of all U.S. citizens and residents unless you qualify for an extension or you are the spouse of a non-resident.
The first option is to file an annual tax return by April 15 of the following tax year after you earn money. In the United States, this is Form 1099-MISC, available on the IRS website.
You can prepare your tax calculations without a licensed professional, but it requires time and discipline. Of course, you could hire someone to do it for you, but paying your American freelancing taxes may be challenging. So expect to pay self-employment tax or delegate this task to a CPA expert.
The primary forms you’ll likely need are the following:
- Form 1099-MISC. It shows how much you earned from “other services” (not including wages or salary) performed for someone other than your official employer(s), such as regular freelance work. Some standard payments reported with this form 1099-MISC include rent, royalties, and interest.
- Form 1099-K. Payments made through a credit card processor or third-party network must be reported with this form. If you earned more than $600 a year from a credit card or any other method that does not go through your employer, you’d need to pay taxes on it.
- Form 1040-ES. With this form, you can pay quarterly estimated taxes so you don’t have to pay a huge tax bill in April, which can be brutal on freelancers and self-employed workers who often do not have set salaries.
- Form W-9. This form aims to get a U.S. taxpayer’s information, such as identification number, address, and name. If your client asks you for the W-9, they will report your contract payment to the IRS.
Let’s look at a few more items you should consider when preparing your taxes as a freelancer.
Write off Business-Related Expenses
The first thing to understand is that as a 1099 worker (i.e., a freelancer or independent contractor making particular jobs or assignments), there are many expenses you can write off when filling out your tax form, including but not limited to the following:
- Home office expenses, such as rent, utilities, and internet.
- Business equipment, such as computers and office furniture.
- Travel expenses, such as airfare and hotel costs for business trips.
- Vehicle expenses, such as mileage or actual expenses for business-related travel.
- Insurance premiums, such as liability insurance for your sole business.
- Professional development expenses, such as continuing education courses and industry conferences.
Remember that to deduct these expenses, they must be necessary and ordinary expenses related to your freelance business, and you must have meticulous records.
You’re Responsible for Paying Freelancer Taxes
As a U.S. freelancer, here are a few of your tax obligations—ensure you know which taxes you need to pay and which ones you don’t:
Freelancers and independent contractors must pay self-employment tax, which goes to Social Security and Medicare taxes. Note that the rates and income limits may vary from year to year.
- In 2022, the self-employment tax rate was 15.3% on the first $147,000 net earnings income minus business expenses.
- In 2021, the net earnings income limit was 142,800.
Refer to the Self-Employment Tax at the IRS web portal for the latest updates.
Federal income tax
Freelancers must pay federal income tax on their net earnings. The federal income tax you owe depends on your income level, deductions, and credits.
You can use IRS Form 1040 to calculate your federal income tax.
State income tax
Freelancers must pay state income tax on net earnings if they live in states that require that and depending on the generated income.
If you’re self-employed, you must file a state income tax form each year with the state that requires you to file (e.g., California Franchise Tax Board). Also, some states require you to pay estimated taxes.
Remember that each state has its tax codes, so the tax obligation you pay as a freelance worker may differ from state to state.
Benefit from Filing Quarterly Projected Tax Payments
Because freelancers don’t have taxes withheld from their paychecks as traditional employees do, it is usually better to remit quarterly estimated tax payments to the IRS to avoid penalties and interest.
Make due payments if you anticipate owing more than $1,000 in taxes in federal income taxes during a quarter. Also, use IRS Form 1040-ES, Estimated Tax for Individuals, to calculate your quarterly tax payments.
Track Your Expenses
As a 1099 worker, remember that you have many deduction options and can expense most things related to running your freelance business, including home office expenses, travel expenses, business equipment, and more.
However, you need accurate records of your income and expenses, including invoices, receipts, and bank statements, to file your taxes accurately and claim all deductions you can file.
For this purpose, use specialized programs for self-employed filers to track and manage your income, expenses, and more, such as TaxAct, FreeTaxUSA, and TurboTax.
Consider Forming a Business Entity
Even though you are a freelancer, consider working under a personal LLC or S Corporation, especially if you believe doing so will give you a tax advantage and liability protection.
For example, by working under an LLC or S Corp, you can pay yourself fair compensation for that role, subject to Social Security and Medicare. Then, you can receive any residual earnings from the entity as dividends, which does not attract self-employment tax.
Additionally, working under an LLC can allow you to take advantage of more significant business expense deductions than a freelancer who files taxes as a sole proprietor.
Consider Using the Services of a Tax Professional
As a freelancer, you must handle many tax-related responsibilities personally. This includes understanding your tax obligations, tracking your income and expenses, and filing your taxes correctly and on time.
While it is possible to handle these tasks alone, working with a tax professional has many benefits, including:
- Expertise and knowledge: A tax specialist can help you navigate the complicated tax landscape and ensure you abide by all applicable tax refunds.
- Minimizing tax liabilities: A tax expert can help you take advantage of more tax deductions and credits, thereby minimizing your tax burden.
- Avoiding mistakes and penalties: A qualified tax professional can help you avoid mistakes and ensure you file your taxes correctly and on time.
Keep up with Tax Law Changes
Because changes constantly happen, staying informed about tax law changes that may affect you as a freelancer is essential.
You can keep up with tax law changes in various ways. For example, you can:
- Subscribe to IRS newsletters: The IRS publishes newsletters and updates on tax law changes and other important tax-related information. You can subscribe to these newsletters on the IRS website.
- Follow tax blogs and websites: Many tax-related blogs and websites provide updates on tax law changes and other tax-related news.
- Check the IRS website: The IRS website has a newsroom section dedicated to tax law changes and updates. You can check this section regularly for the latest information.
The best way to manage your taxes and save money as a freelancer is to track your expenses, take advantage of all business-related deductions, pay taxes on time, and consult a tax professional when needed.
Tax laws have changed over the years, so staying up-to-date on the latest changes is essential to avoid penalties or interest charges.
If you are new to freelancing, we recommend finding an experienced CPA to guide you.