Being a freelancer comes with the responsibility of filing your taxes quarterly every April 15, June 15, September 15, and January 15.
Under certain requirements, the IRS will allow freelancers a deduction for a home office as long as it's a dedicated workspace.
Other potential deductions for a freelancer include mileage and the annual interest on a credit card strictly used for business expenses.
Transitioning from full-time or part-time employment with a company to working as a freelancer comes with several advantages. Being able to set your own schedule and choose what type of projects to handle gives you more control over your life and helps to relieve stress. However, understanding and filing your taxes can come with a few twists and turns you may not have considered. Below is a quick primer on how to pay taxes as a freelancer.
Defining Freelance Work
The Internal Revenue Service (IRS) considers freelancers as someone who is self-employed. You might be wonder, "Do freelancers pay taxes?" If you earn $400 or more from freelance work, you are required to pay quarterly taxes on that amount.
Keep in mind that freelancers can establish their business in one of several manners. For example, you can be a sole proprietor, partner with others, be a corporation, an S corporation, or a Limited Liability Company. If you are unsure which type of structure is best for your particular needs, you may want to consider consulting a qualified tax professional.
Differences between a W-2 Employee and a Freelancer
W-2 employees receive a W-2 form each year that details their gross earnings, including the amount of federal and state taxes withheld, as well as deductions for social security and medicare.
Because those amounts are paid to the federal government, the IRS only requires them to reconcile their taxes on or before April 15 of each calendar year. Employers of W-2 employees also pay one-half of their social security and Medicare taxes.
Freelancers, on the other hand, are responsible for that entire amount, which means instead of paying 7.65% of those taxes, they are required to pay the full 15.3%. Instead of receiving a W-2 from one or more employers during the calendar year, freelancers will receive a form 1099-NEC stating their non-employee income. This is also the amount of money that the entity they performed work for reports to the IRS. It’s important to note on your 1099 forms that no deductions were made for any taxes.
Freelancers Are Required to Pay Estimated Taxes Quarterly
With a freelance status comes the responsibility of filing your taxes quarterly. The IRS requires you to submit a quarterly tax return using Form 1040-ES, which is the estimated tax you owe based on last quarter’s gross earnings. The form and taxes owed are due on the following dates: April 15, June 15, September 15, and January 15 of the next year.
Remember, this tax is the estimated amount you earned in a quarter, so don’t fret over not reporting the exact amount of your quarterly earnings. For example, if you earned $10,000 between January 1 and March 31 of a calendar year, you should file a quarterly report on April 15.
It’s also important to note that federal and state tax rates can change between calendar years, so make sure you understand what is required of you from year to year. If you are unsure, it would be wise to consult a qualified tax professional.
Similar to filing taxes with a W-2, you will need to choose your filing status. Are you Single, Head of Household, Married Filing Jointly, or Married Filing Separately? Once your status is determined, follow the IRS chart and submit the appropriate amount.
Here’s an example: If your status is single and you earned between $9,700 and $39,475 in a quarter, your tax rate is $970 plus 12% of any amount over $9,700. Let’s say you earned $15,000 that quarter. You will owe $1,606 in quarterly taxes on freelance work.
Let’s say you worked as a graphic artist for a corporation in an office environment. They typically provided you a workspace such as an office or cubicle, a computer, office supplies, a telephone, and possibly paid all or part of your healthcare expenses. Now that you chose to fly the coop and go out on your own, it’s your responsibility to lease or purchase those items.
Some items you may need include a computer, software, an internet connection, a phone line, and phone — which includes landline and cellular services — advertising expenses, health insurance premiums, professional development, bank fees, and miscellaneous office supplies, among other things.
Keeping Detailed Records Is Important
As an employee, you may not have paid much attention to keeping track of your daily expenses. Now that you’re running your own show, however, you’ll want to maintain detailed records of all your business expenses.
If your primary cellular line is also your business line, it’s easy to keep track of your monthly phone expenses since you receive a statement each month. However, for such items as meals and travel, make sure you save your restaurant, airline, and hotel receipts and file them in a safe place. Many freelancers obtain a credit card solely for business purposes, which makes keeping track of their expenses somewhat easier.
Tracking your mileage is also important. If you are required to drive to client meetings or meetings to discuss your services, those expenses are deductible. The IRS allows a deduction of 62.5 cents for every mile driven for business purposes. This means if you made a 500-mile round trip between two destinations for a business meeting, your deduction is $312.50. Remember, this only applies if you use a vehicle you own or lease. If you used public transportation or services such as a taxi or ridesharing service, the mileage deduction doesn’t apply; however, you are allowed to deduct the expense of the fare.
Retirement Savings as a Freelancer
Now that you’re a freelancer, you probably don’t have access to your previous company’s 401(k) plan to sock away retirement dollars. However, depending on your business structure, you can contribute to one of several types of plans that include an Individual Retirement Account (IRA), SEP IRA, Simple IRA, and even a self-employed 401(k).
Anyone with earned income, including freelancers, can contribute up to $6,000 annually to a Traditional IRA, with the amount increasing to $7,000 if you are over 50. (In 2023, the limit on annual contributions will increase to $6,500, and the "catch-up" contribution for individuals 50 and over will remain at $1,000.) The deductibility depends on your modified adjusted gross earnings and is phased out above specified amounts.
Contributions to this type of IRA grow tax-free until they are withdrawn. Afterward, any withdrawals are taxed at your individual rate, depending on your adjusted income. The minimum age to withdraw funds without penalty is 59 ½. After age 70 ½, you can no longer contribute to an IRA and must begin taking minimum distributions.
IRS guidelines vary for different types of savings vehicles, such as Roth IRAs, SEP IRAs, and self-employed 401(k) plans, so make sure you research or obtain advice on the right plan for your specific needs.
Filing Your Quarterly or Annual Return
Some freelancers may prefer to file their own tax returns. That’s okay, as long as you are confident that you understand the reporting requirements and the process. Others prefer to use the services of a professional tax professional such as a CPA, who may have a detailed understanding of the process given they may also be considered a freelancer.
If you choose to file your own taxes, using online services offered by Intuit, H&R Block, and others is an option. Online resources are often very detailed and can easily guide you through the process.
Regardless of the method you choose, remember the burden of filing your taxes correctly rests solely on you.
April 15th is the last day you can file your annual taxes without the possibility of incurring a penalty. Depending on the calendar day the 15th falls on, the IRS may extend the deadline by a day or two.
Don’t Get Overwhelmed About Filing Taxes as a Freelancer
Enjoying life as a freelancer should be a positive experience. Sure, there are lots of new things to learn such as how to properly file your taxes, but with the information provided here, you’re one step closer to successful self-employment!