Freelancer’s tax guide: Simplify your filing process

Say goodbye to tax season stress. From estimated payments to business structures, learn the ins and outs of freelancer taxes in our comprehensive guide.

Did you know that 36% of U.S. workers are now freelancing? Whether it’s your full-time gig or a side hustle, welcome to the club.

But let’s talk about the less fun part: taxes.

Don’ worry, we’ve got you covered with some straightforward steps to keep you on track.

The benefits of working for yourself are plentiful — you can set your own hours, pick and choose your clients and do your job from anywhere you want. However, you’re responsible for all aspects of your business, from marketing and IT to health benefits and retirement savings. And filing your taxes is very different than it is when you collect a traditional salary and a W-2 tax form from your employer each year. In fact, getting your taxes right can be one of the hardest parts of freelancing.

Here are some ways you can think about preparing and paying taxes when you’re self-employed.

Step 1: Know filing basics

If you’ve earned more than $400 in net self-employment income — even if it’s just from a side hustle — you must file taxes. With most freelance income, you report it on Form 1040 Schedule C, as part of your personal tax return.

Starting with the 2023 tax season, payment platforms and marketplaces such as Venmo, PayPal and Etsy must now report to the IRS every user who earned more than $600 through the site or app. This is a big change from the previous reporting threshold of $20,000.

Step 2: Understand tax obligations

As an independent worker, you must pay federal and possibly state income taxes at a rate based on your total annual income. You also owe Social Security taxes (the employee’s share is typically 6.2% of gross pay) and Medicare taxes (typically 1.45% of gross pay).

But since the IRS considers freelancers both an employee and an employer, you must also pay the employer’s share of Social Security and Medicare taxes, amounting to another 7.65% of gross pay. On the bright side, the employer’s portion of Social Security taxes is tax deductible.

For 2024, the Social Security tax applies only to the first $168,600 of your earned income. You may also owe an additional Medicare tax of 0.9 percent on all earnings exceeding $250,000 for married couples filing jointly and $200,000 for individuals.

Step 3: Circle these dates on your calendar

Freelancers file their annual tax return at the same time everyone else does (April 15 in 2024), but there’s one important difference: When you work for yourself, you have to pay estimated taxes four times a year if you expect to owe more than $1,000 in taxes for the year. Technically everyone pays their taxes on a rolling basis. But as a salaried worker your employer withholds the cash from your paycheck and makes payments to the government on your behalf.

In 2024, quarterly estimated taxes are due on April 15, June 17, September 16 and January 15 (2025). By these dates, you’ll need to file a 1040-ES form and pay one-fourth of your expected annual tax bill, either by mail or online. Depending on where you live, you may also have to pay estimated taxes to your state.

How do you estimate what you owe? There are multiple ways to determine that. You can estimate your tax bill based on last year’s return or calculate your taxes for each quarter as you go based on how much you’ve earned in those three months. If you work with an accountant, they can calculate your quarterly payments, and some tax software will do so as well. If you miss a quarterly payment, the IRS may charge you interest on the amount you underpaid.

The 1099 mystery: Solved

Freelancers are often called 1099 workers because that’s the tax form clients send you showing what you were paid in the previous year. You should receive those by January 31 or possibly February 15. Note that your clients must send a copy to the IRS as well.

There are several types of 1099s, depending on whether you sold goods or services:

•  1099-K. This form shows the revenue you received for selling items through an online platform or picking up gig work through an app.

•  1099-NEC. NEC is short for non-employee compensation, and this is the form you’ll receive for providing freelance services to another business. It’s required if you earned more than $600.

•  1099-MISC. This form shows the revenue you earned through royalties (for example, if you wrote a book).

Note: If a company or individual you worked for doesn’t send you a 1099, you still must declare that income on your tax return.

Business set-up: Make it work for you

The way you set up your freelance business can have an impact on what kind of tax return you file. The default structure — if you don’t incorporate or register the company — is a sole proprietorship. In that case, you simply report your business income on your personal tax return using a Schedule C, Profit or Loss from a Business.

There are other options for how to structure your business. A limited liability corporation (LLC) provides legal protection for the business and can help separate your personal and business finances. You can create an LLC yourself using an online service or hire a lawyer to help you. You can choose to treat the LLC as a sole proprietorship or as a Small Corporation, or S-Corp. If you opt for an S-Corp, you pay yourself what the IRS considers a “reasonable salary” through the business and file a separate tax return on behalf of the business.

Deductions: Your secret weapon

There are many tax deductions available to freelancers. Just about everything that touches your business may be deductible, or at least a portion of it may be.

Common freelancer tax deductions include:

•  Office expenses 

•  Equipment and materials

•  Phone and internet service

•  Travel, including car mileage and meals while traveling

•  Client meals, entertainment and gifts

•  Subscriptions and dues

•  Marketing and advertising

•  Health insurance for yourself (including Medicare premiums), your spouse and dependents

•  Interest on loans for the business

When you’re self-employed and work from home, you may also be able to deduct a portion of your housing expenses, including mortgage payments, insurance and utilities. But the rules for taking the home office deduction are complicated, so check with a tax pro. For one, the space must be for the exclusive use of your business (so not the dining room table where you eat dinner or the den where the family watches TV).

As with personal tax write-offs, the IRS requires you to keep receipts or other documentation for all the business expenses you deduct, and the costs should be “ordinary and reasonable.”

Retirement planning: Yes, you can

Yes, there are several tax-advantaged plans designed specifically for self-employed workers. These include:

•  Solo 401(k) and solo Roth 401(k)

•  Simplified Employee Pension Plan (SEP IRA)

•  Savings Incentive Match Plan for Employees (SIMPLE IRA)

As with a workplace 401(k) and traditional IRA, these plans allow you to deduct the money you save from your income, up to certain limits, which reduces your tax bill. The account grows tax-deferred until you make withdrawals in retirement. In the case of a solo Roth 401(k), your contributions are not tax deductible, but your withdrawals are tax free.

Because you don’t have the benefit of getting an employer match, these accounts may have higher saving limits than workplace 401(k) plans and IRAs do. You can set up the type of plan that works best for you and fund it for the previous year up until the April tax-filing deadline.

Your tax season, simplified

There you have it – a simple guide to tackling taxes as a freelancer. Remember, staying organized and understanding your responsibilities can make tax season a breeze.

Visit the Tax Resource Center for more tips and tools for tax season and beyond.

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