Freelance work doesn’t equal freedom from taxes. The IRS considers anything over $400 a business – and Uncle Sam wants his cut.
More than 2 million Americans have picked up a freelance gig every year for the past eight years. That makes up 15 percent of the workforce, says the National Bureau of Economic Research.
Self-employment can feel liberating when making your schedule. But a study called “The forces driving the growth of the freelance nation” finds it makes tax time confusing.
- 35% have trouble understanding and paying taxes.
- 62% don’t make any estimated tax payments.
- 1 in 4 have a hard time tracking expenses.
- 3 in 4 don’t deduct expenses, which could save them money.
Here’s how to file taxes as a freelancer while holding onto more of your hard-earned money.
The two main freelance taxes
Regular income tax. You pay this whether you are self-employed or working for a company. The percentage you pay depends on how much you make, since standard tax brackets apply to both freelance and wage-earned income combined.
Self-employment tax. It’s usually a 15.3% tax, meant to cover your Social Security and Medicare contributions. It may seem unfair to be taxed twice, but as a freelancer, you choose to be both employee and employer, and you must pay taxes that reflect that.
How much should I set aside for freelance taxes?
Don’t wait until the end of the year to pay. You may spend money early. And you risk getting charged a penalty by paying annually.
The IRS prefers you pay an estimated amount quarterly.
Freelancers should save between 25 and 30% of every check for taxes. If you live in a state with income tax, your state taxes must be factored in as well.
Ideally, you should have a separate savings account specifically for taxes. This way you won’t be tempted to use any of it before your tax bill is due.
Estimate your owed federal and state taxes based off your taxable income.
Do freelancers pay taxes on the same day as everyone else?
Yes, as a freelancer, you have to file your taxes on the same day in April as other taxpayers. However, since freelancers don’t have an employer to withhold part of their paycheck for taxes, the IRS recommends paying quarterly estimates of what you think you will owe. If you expect to owe $1,000 or more when you file your tax return, the IRS requires you to do so.
Check this chart from the IRS to check the due dates for your quarterly estimated taxes. If your estimates are lower than what you owe, you will owe more money at the end of the tax year. If your estimates were higher, the extra money will come back in your tax refund.
If you’ve been working freelance and haven’t filed, you may already owe the IRS based on company business filings. Check now through this tool.
What tax forms do freelancers need?
The main form freelancers need to worry about is the 1099-MISC form. You should get this form from any client that paid you more than $400 during the tax year. All your 1099 forms are essential for filing taxes as a freelancer.
You also need to familiarize yourself with Schedule C, the self-employment schedule of Form 1040. This form is for sole proprietors or people running their own businesses.
Claiming your tax deductions
Many freelancers don’t claim deductions when they could be saving money by doing so. You can itemize your business expenses and end up owing less in taxes by decreasing your taxable income. Make sure you record your income and expenses, so you have a reference when it’s time to itemize!
There are many different expenses you can deduct, including some of your housing expenses if you have a qualifying home office. The IRS can be strict about deducting expenses, so you may want to talk to a tax professional about which of your expenses qualify.
Don’t forget about other expenses
When you set aside money, don’t forget about other big expenses you need to save for. Like taxes, car insurance and health insurance can take you by surprise. Put your tax money in your separate savings account, but don’t neglect your emergency fund.
As a freelancer, there is really no such thing as paid time off. Maintaining your emergency fund helps you stay out of debt in the future and enables you to cover all other expenses.
A note on side gig taxes
If you work a side gig in addition to a full-time job, you can’t count on your job’s W-2 withholdings to cover all your tax expenses. Make sure you are still setting aside money from your side gig checks to pay your taxes.
Work with professionals to get it right
Working for yourself is a tough job. You already do your regular work plus your own marketing, bookkeeping, accounting, and more. When it comes to taxes, don’t add it to your already-full list of tasks. You don’t want to mess with the IRS, and a tax professional will help you get it right every time.