How Freelancers Should Plan for Taxes

Working as a freelancer or contractor can come with many great perks, but one downside is having the responsibility of handling your own taxes.

If hiring a tax professional is not in your budget, you’ll want to be sure you’re making the necessary decisions to protect yourself from things like audits and inaccurate tax filings. In fact, you’ll want to prepare early so it’s much easier for you to file your taxes come tax season.

Below, we answer some FAQs and address misconceptions before plunging into a short guide on successful tax planning for freelancers.

Freelance Tax FAQs

Do I have to pay even if I freelance part time?

Yes. If you earn over $400 from a self-employed business, no matter the industry you work in (even ebay sales), that income must be reported to the IRS.

Why do I pay self-employment taxes as a freelancer? Are those different?

The IRS views all freelancers as self-employed businesses. You are your own boss, and whatever services you provide, they are counted as your business.

Do gig-economy workers count as freelancers?

In some cases, yes. Income earned from a side hustle such as Uber or Lyft is taxable.

Which receipts do I need to keep?

In short, anything related to your business. As long as you make a purchase for your freelance work, that includes things like office supplies, furniture, gas, and car insurance, you’ll want to keep records of those purchases.

What if my client/services are paid in cash?

You’ll need to create receipts and records for any purchases made, whether that’s done digitally or using cash. Any income needs to be reported to the IRS

Do I have to pay quarterly taxes as a freelancer?

Yes. The IRS requires quarterly estimated payments. They provide all relevant information for self-employed workers and estimating quarterly payments online at the Self-Employed Tax Center.

What federal taxes do I owe as a freelancer?

As a self-employed individual, income tax and self-employed taxes are all on you. Income tax from services provided and self-employed taxes for Medicare and Social Security. When hired by a normal employer, Medicare and Social Security taxes are half-covered by the employer.

What about state taxes?

Look up your state tax organization online. They will lay out the taxes for self-employed individuals. You may have to pay quarterly taxes in addition to annual filings.

Calculating Your Self-Employed/Freelancer Taxes

As mentioned in the FAQs, every freelancer needs to pay estimated quarterly taxes. This is in addition to annual tax filings. Simply, you have to file according to the schedule found on the IRS website at the Self-Employed Tax Center. This website offers all the forms you need, too.

The easiest calculation in your tax filing is the self-employment tax, which is 15.3 percent of your net earnings. Right off the bat, this means you should save 15.3 percent of net income (what you make minus expenses) to pay this tax.

Income tax is not so straightforward. This is where the quarterly estimates tie in. When reporting quarterly income, you must use current tax brackets to calculate how much to pay the IRS. Use form 1040-ES for quarterly income.

Generally, you’ll find the recommendation that freelance workers should save 25-30 percent of their income to cover all of their taxes. This might suffice for many self-employed workers, but it might provide greater peace of mind to have more accuracy.

To do so, estimate your annual net income (gross income minus expenses), factor in married filing jointly income (if applicable) and then subtract all applicable deductions. This amount will be more accurate, especially if you work with IRS forms.

This income tax amount, together with the Self-Employed Tax amount, is your annual tax responsibility. Add them together and divide that sum by four and you have the quarterly taxes.

If all income is properly reported, and all deductions managed, then the best outcome is to owe no taxes and receive no return. Overpaying is not something that’s punishable, but it leaves freelancers with less money in their pocket.

How to Maximize Quarterly and Annual Deductions

When it comes to including deductions as a freelancer, consider as many items as possible.

Anything used for work purposes will have a related deduction opportunity. From those post-it notes to your vehicle. But anything freelancers and self-employed workers wish to deduct require proof-of-purchase. Receipts. Keep all your receipts.

Maintain organized records on purchases big and small so they can reduce overall taxes owed. Here are the main areas of tax deduction for freelancers and self-employed workers:

• Home office space and furniture
• Miles driven to and from work sites
• Asset depreciation
• Food and supply purchases while working
• Industry-specific deductions

Consider Our Resources for Your Business Needs

Have a question? Need more answers on taxes or operating a business? Check our article database for the advice you need. Let us know if we missed a tax question you’d like answered.