There are a lot of great reasons to start freelancing. You choose what your schedule will look like, work wherever you like, hand-pick the clients you want to work with, and the list goes on.
But running your own business also comes with its fair share of new responsibilities. For instance, things like figuring out how to get freelance clients or setting your rates effectively.
And one of the biggest challenges freelancers face is learning to do their freelance taxes.
The weight of this responsibility can leave freelancers feeling overwhelmed when it comes to tax time. And I won’t sugarcoat things – doing your freelance taxes properly is a crucial part of running your business.
That being said, there’s no need to stress. Figuring out your taxes is definitely doable, and I’m here to make it easier for you.
In this article, I’ll cover everything you need to know to make tax time just another simple step in your freelancing routine.
How to do Taxes as a Freelancer guide incoming!
Getting started: Doing taxes as a freelancer
Before we get to the fun stuff like keeping records and calculating your taxes, here are a couple of things you should know to get started doing your freelancer taxes.
What is the self-employment tax?
The Internal Revenue Service (IRS) considers freelancers to be self-employed when they make more than $400 in a year from any one client. If you meet that criteria, then a self-employment tax of 15.3% applies to you.
Basically, this amount represents a 12.4% Social Security tax and 2.9% Medicare tax that would normally be withheld through your employer.
So, let’s say a given freelancer (we’ll call him Joe) has earned a net total of $1,000 in the past year (for simplicity’s sake). Joe would need to pay $153 in self-employment tax.
Keep in mind that the self-employment tax is paid in addition to the standard income taxes freelancers owe, depending on their tax bracket.
It’s important that you stay aware of any taxes you owe the government on the federal, state, and local levels. While federal taxes will apply to everyone, it’s a good idea to brush up on your state and local tax requirements too.
When do freelancers need to pay taxes?
As a freelancer, if you expect to owe more than $1,000 in federal income taxes for the year, you’ll need to pay estimated income taxes each quarter instead of just once a year.
The idea of quarterly payments is to separate one big tax burden into four parts so that you don’t have to pay things all at once with your annual filing.
Make sure that you try to calculate your quarterly payments as accurately as possible to avoid having to pay a remaining balance when you file your annual return by April 15!
If you underpay your estimated taxes by too much, you might have to pay a fee. On the other hand, if you overpay, you’ll just get the difference refunded with your annual tax return. That’s why you may have experienced tax refunds in the past – employers will often pay more on your behalf than necessary, so the IRS refunds you the difference.
So, how can you calculate your estimated quarterly taxes accurately? The IRS provides Form 1040-ES to help you figure out and pay however much you owe for each quarter that’s just passed.
It’s important to stay on top of when each quarterly payment is due to avoid any late penalties.
Here’s when each quarterly payment is due:
- April 15: Your annual tax return for the previous year, and the first estimated quarterly payment
- June 15: Your second estimated quarterly payment
- September 15: Your third estimated quarterly payment
- January 15: Your fourth estimated quarterly payment
If you happen to miss the payment deadlines or don’t make sufficient payments, you might face an interest charge of 3% (as of 2021) as a penalty.
BUT you don’t have to pay quarterly estimated taxes if you meet all of the three following conditions set by the IRS:
- Your total tax owed for the previous year was zero (in other words, you had no tax liability)
- You’re a U.S. citizen or resident (for the whole prior year at minimum)
- Your last tax year covered an entire 12-month period
You can also opt to pay your self-employment tax with your quarterly income taxes (which have to be paid each quarter if you meet the criteria), or you can pay all of your self-employment tax with your first estimated payment.
Feel free to take a look at the IRS’s estimated taxes FAQ for any additional information that might be specific to you.
And if the idea of estimating your taxes has you sweating, you can also use a tax calculator, like Bonsai, to help you determine what you’ll owe.
Doing your freelance taxes in 5 easy steps
1. Stay organized year-round to keep tax time headaches at bay
Let’s face it, tax time is stressful for most of us out there, and being a freelancer tends to add an extra difficulty factor. But there are steps you can take to make the tax process just another smooth part of doing business for you.
So, don’t put off thinking about your freelance taxes. It won’t help you, and your future self will kick you for it. Start thinking about your taxes on the regular.
What can you do to make tax time easier for you?
Keep a clear record of your income and business expenses as they happen.
This may mean updating your records daily, weekly, or monthly depending on your unique freelancing circumstances. Regular upkeep of your records will ensure that you’re taking care of things while they’re still fresh on your mind, and you won’t suddenly find yourself with a mountain of disorganized information at the end of the quarter.
Doing this is important not only for the convenience it provides when calculating your taxes and deductibles, but it’s also crucial to have accurate records you can refer to in case of an audit.
You can set up an Excel or Google sheet to help keep track of things or use accounting software for a more streamlined process. There are various apps available to freelancers, like QuickBooks, Bonsai, or FreshBooks.
Another great tip that you’ll often see recommended is to set up a separate bank account to put aside money for your taxes or one to keep track of your business expenses.
When putting money aside, you can set things up to automatically transfer a percentage of your income into your separate savings account or add up your income at the end of each month and transfer it then.
It’s a good idea to consider setting aside around 25-30% of your income to cover any tax burdens you’ll need to pay.
2. Gather your documents
As a freelancer, there are a few documents you’ll need to have on hand and get familiar with.
At a glance, you’ll need…
- Any 1099 forms received
- Your income statement
- Record of your expenses
Now let’s break that down.
Instead of the W-2 form you get from employers, freelancers should expect to receive a 1099-MISC form (or 1099-NEC form) from each business client who paid you $600 or more for that tax year. Or, if a client pays you through PayPal or a similar service, you might receive a Form 1099-K from them instead.
You should also have your personal accounting records ready, like your income statement and records of your expenses.
What tax form do freelancers need to fill out?
The Schedule C (Form 1040) is where freelancers will report all of their income and expenses.
To give you an overview of how to do taxes as a freelancer using the Schedule C form…
- Part I of Form 1040 is where you’ll report your income, which includes your 1099 forms from clients. You’ll also need to fill out any other income you received as a freelancer, regardless of whether you received a 1099 for it (this is where tracking your income comes in handy).
- Part II-V of Form 1040 is where any of your expenses/losses from throughout the year will go so you can claim your deductions. I’ll go over claiming deductions in more depth below.
Both your 1099s from clients and your personal accounting records will need to be attached or filled out on the Schedule C form.
You’ll send Schedule C, along with any attached forms, to the IRS with your payments each quarter.
If you decide to use a tax preparation software or work with a tax professional, they’ll fill out Schedule C for you based on the information you provide.
3. Consider working with a tax professional
Working with a tax professional, or CPA, might pay off well for you — not just by keeping you from having to figure things out on your own but also through benefits like lowering your tax burden and helping you to avoid potential penalties.
For years, I’ve used QuickBooks to keep track of my expenses, and then I give access to my accountant, who uses that information to file my return.
If your tax status stays pretty consistent each year and your burdens are small, doing things on your own may be pretty simple as long as you’ve kept good records.
But for more complicated situations, like having multiple income streams or working across state lines, you might want to consider talking to a pro. And in my experience, a good professional pays for themself through their ability to identify deductions and save you money.
In lieu of a professional, there are several tax software that can make the process easier for you. I would most recommend TurboTax by Intuit.
But keep in mind that some software can end up as expensive as working with a CPA, depending on your tax situation.
Don’t worry — if you just want to sort your taxes out on your own, you’ll be able to find the information you need below.
4. Calculate your taxable income and deductibles
How do you calculate your freelance income?
Now, you’ve got your documents ready and you know which form you need to fill out, how do you calculate your taxable income?
The formula for your taxable income is this:
Net income = your gross income – your expenses
Taxable income = your net income x 0.9235
What does all that mean?
Basically, your gross income is the total amount you made from your clients before considering any expenses you had.
Then, when you subtract the total amount of your eligible expenses from your gross income, you get what’s called your net income.
Finally, your taxable income — the income that you’ll pay taxes on — amounts to 92.35% of your net income.
That wasn’t too tricky, right?
This is why a lot of freelancers (myself included) will set aside 25-30% of their total income for tax liabilities and not just 15.3%.
Once you have all that calculated, it’s time to lower the amount you owe for your taxable income through tax deductions — otherwise known as the best part of tax time for freelancers (apart from when tax time is over).
If you’re still feeling confused, this video will help walk you through calculating your taxable income.
Determining your freelance deductibles
Despite the fact that freelancers can claim a lot of deductions to reduce their tax burden, a surprising amount of freelancers don’t take deductions from their expenses. Some don’t even realize that they can.
That means many freelancers are paying more than they have to in taxes.
Remember, in the eyes of the IRS, you are a business, and just like businesses have start-up costs and regular expenses in order to be able to offer their products and services to the world — so do you.
Even though discovering that you have to pay both self-employment tax and income tax can come as both a bit of a surprise, the upside is that you can rightfully minimize your tax burden by claiming deductions.
But, before you claim your morning espresso as a business deduction, keep in mind that the IRS does require deductions to be both ordinary and necessary for the function of your business.
(I know — you’re thinking that espressos are both ordinary and necessary).
That said, there are several legitimate expenses that you may not even realize you depend on to keep your business running smoothly.
Before we dive into the most common deductions for freelancers, here are the three most important practices you need to develop to ensure that you’re doing things right when it comes to deductions.
- Keep personal and work things separate
- Document everything
- Do your bookkeeping on a regular basis
As a self-employed person, things can get a little bit grey when it comes to deductions: like “what percentage of my phone time is for personal conversation and what percentage for business?”
And if you’re just starting out, you might not feel ready to take steps like keeping thorough documentation or opening additional bank accounts. But, doing these as soon as possible can make your life much easier when it comes to taxes.
For example, when it comes to deductions, being able to look at your spending on a separate bank account and know that everything on the balance sheet is a work-related expense is a huge time saver.
Many banks have easy options for opening an additional account, and it can just be a personal account that you have designated for all things work-related. (This goes for receiving payments as well).
Likewise, you could open up a work-only credit card to keep track of expenses that way.
And when it comes to things like deducting gas or a business meal, this can also be grey. That’s where solid documentation comes in.
If you keep receipts or a document stating what the trip was for and how many minutes it took, or why that dinner was a business meeting and what topics you covered, it can go a long way in keeping you organized and legitimizing your expenses.
Remember, you’ll be paying your freelance income taxes every quarter.
Keeping all of your deductions on a spreadsheet and updating them as you go will make it almost as easy as copy-paste when it comes time to fill out Schedule C.
As you begin to make a list of things that you use to run your business, it’s a good idea to do some research on how that item is classified as a deduction and if there is any extra information you need to be aware of.
For example, you can deduct rent and utilities for your home office, but not if the office doubles as a shared family space. The space’s sole purpose must be your office.
Take a look at some of the most common deductions for freelancers:
- Home office space: a portion of rent, internet, and utilities
- Office supplies and equipment
- A portion of your phone bill (or all of your work phone bill)
- Fees for a workspace membership
- Vehicle expenses and/or gas
- Business meals
- Software (like Zoom, Office, and Adobe) and website hosting fees
- Other online platforms (like Canva, Buffer, and Mailchimp)
- Marketing and ads
- Licenses and certifications
- Professional memberships
- Legal and professional services
As a reminder, staying organized on a daily basis can help you save a ton of money when it comes to deductions.
And if you think you might be able to claim several deductions but aren’t sure how to go about it, this is where a tax professional might really be useful for you.
5. Submit your forms
Finally, the light at the end of the tax tunnel is here. At this point, you will have:
- Gathered your 1099 forms
- Filled out your Schedule C form, which includes your income, expenses, and potential deductibles
The last step in the how to do taxes as a freelancer process is to send your forms with your payments to the IRS before the deadlines.
You can either mail them to the IRS with a check using Form 1040-ES or make direct online payments with your bank account information, debit card, or credit card.
Or, if you’re using tax software, like TurboTax, or you worked with a CPA, they’ll file and send everything in on your behalf.
And that’s it.
How to do Taxes as a Freelancer: Done!
That wasn’t so bad, right?
Let’s go over a few key takeaways about taxes for freelancers.
The biggest one is probably that, as a freelancer, you must pay both income tax and self-employment tax, which are paid quarterly. And you’ll have to estimate and set aside those amounts.
Also, it’s a good idea to take note of these key concepts:
- Your income must be reported once you hit $400 gross revenue
- Your taxes are due on April 15th, June 15th, September 15th, and January 15th
- Self-employment tax is your Social Security and Medicare (which are simply deducted on behalf of employees, but not for you)
- Your taxable income is (your gross income – your expenses) x 0.9235
- Your self-employment tax is 15.3% of your taxable income
- Your clients should provide you with a 1099 for every invoice over $600
- You will need to have your 1099-Misc, 1099-NEC, and 1009-K documents on hand
- You’ll need to be prepared to fill out Schedule C to report all your income and expenses
- You can make your payments directly to the IRS either through mail or online
Don’t forget to make a folder for your forms and keep a documented record of both your income and your expenses (if you’re just starting out, use a spreadsheet), and make sure you take advantage of your deductibles.
Finally, remember that with a little bit of planning and organization, you can make keeping up with your taxes so much easier for yourself.
And, once you really start to scale, tax software and a tax professional can save you a great deal in terms of money (and headaches).
Keep in mind that learning how to do your taxes as a freelancer is just one part of running a successful freelance business that you’ll need to nail down.
If you’re struggling to learn to manage your money and time effectively, I’ve created a course to help YOU set up the systems you need to free up your time. To learn more, check out my Business for Freelancers course here.