Millennials and Gen Z were pushing for a more remote lifestyle well before the pandemic pushed us all online. Not only that, but self-employed individuals and freelancers are able to save money in other ways, a benefit that helps others from underinvested communities build wealth and create a working environment that suits their lifestyle and needs.
If you currently work as a freelancer, you know what it is to live a life free from the standard 9 to 5. No boss, no stuffy cubicles, and no morning meetings. Plus, if you need to care for your children, you’re able to do that while working from home (and you save on transportation money).
However, if you currently work as a freelancer, you also likely understand just how hard you have to manage and file your own taxes. If you aren’t careful about how you save and spend throughout the year, you can end up with a massive tax bill you have to pay, and that’s no fun for anyone.
For many freelancers, tax season is a stressful time, and we’re here to make it easier for you. Let’s break down how to file freelance taxes for beginners. Learning this before it’s too late can help you save hundreds, if not thousands, each year, leaving you with more to invest in yourself and your small business or side gig.
Who Qualifies As a Freelancer?
In tax terms, a freelancer is someone who is self-employed. And, this doesn’t mean that you can’t work for a company. Tons of people work for companies full-time as freelancers and even head into an office to work 40 hours a week. The only difference here is how you get paid.
When you’re an employee for a company, taxes get taken out of your paycheck each month, and your employer also pays your portion of Social Security and Medicare. When you’re self-employed, you have to pay for your own Social Security and Medicare taxes while also calculating your own regular income tax.
Because you don’t have an employer taking that out of your check for you, you have to be mindful of that and set aside the money (because you’ll eventually have to pay the government your fair share).
What Are Freelance Taxes & How Do They Work?
If you've ever been employed, you likely already know how taxes work. You get paid an hourly rate or annual salary. Each month, your paycheck is a bit less than that total amount because the company has taken out your federal and state income taxes plus your Social Security and Medicare taxes. These taxes are automatically calculated and deducted from each paycheck. But what happens if you are a self-employed person and don’t receive a salary from an employer?
As a freelancer, you are still responsible for paying those taxes, but they’re not automatically deducted every time a client pays you for your services. Instead, you have to keep track of what you earn, along with your deductions, and calculate the total tax you owe come Tax Day each April (actually, in some cases, you may have to calculate and pay taxes every quarter).
Here are the different types of taxes you’ll pay as a freelancer on top of a regular federal income tax and potentially state income tax, depending on where you live…
Employees have their Social Security and Medicare taxes deducted directly from their paycheck. However, as a freelancer, you have to cover the costs of these. It’s referred to as the self-employment tax. The 2020 tax rate for self-employment is 15.3%, of which 12.4% is for Social Security and 2.9% is to cover the costs of Medicare.
When do you have to start paying these taxes? Anyone who has earned at least $400 of income from freelance work must pay a self-employment tax.
The self-employment tax rate of 15,3% represents what an employee and the employer pay. Since you act like both, you may qualify for a 50% tax deduction for freelance work that can reduce your income tax liability.
Federal Income Tax
On top of the self-employment tax, you also have to pay regular federal income tax. Your tax rate depends on your taxable income. You’ll fall into one of a few different tax brackets, each with its own tax rate. Rates range from 10% to 37%. Those who earn under about $54,000 a year, for example, pay a tax rate of 12%.
How do you figure out which tax bracket you fall into? Federal income taxes are calculated and reported on your federal return using IRS Form 1040.
State Income Tax
Most states also require that you pay state income taxes, too (yeah, we know, things are getting pretty expensive, right?).
State income tax is paid to the state where you work, not necessarily where you live. As a freelancer, this can get a bit complicated because you might work for numerous clients across the country but reside in two different states throughout the year. If that’s the case, we suggest speaking to a tax professional who can help you figure out what to do.
How Much Should You Save for Freelance Taxes?
As a “regular” employee, your employer takes taxes out of each paycheck for you. As mentioned, when you’re self-employed, this isn’t the case. So, you’ll need to ensure you’re saving enough from each monthly paycheck to cover the costs of eventually paying your self-employed taxes.
How much should you be saving? According to other finance experts, self-employed workers should save at least 25-30% of their salary for taxes. While this might sound like a lot, it’s actually not much more than was probably taken out of your regular paycheck when working as an employee.
When are Freelance Taxes Due?
Freelancers have to pay their taxes at the same time as everybody else, which is usually around April 15th each year (if this date falls on a weekend or holiday, the returns are due the next business day).
Want to submit your returns early? Great! Do it! You aren’t required to make a payment when you submit your taxes if you’re not ready to hand over that cash. However, come Tax Day (whether that’s April 15th or shortly after), you will be required to have made that payment.
If you file an electronic return, your payment options include using a credit card, debit card, or electronic check. If you apply by mail, you will need to send a check or money order (DON’T SEND CASH!).
What happens if you don’t pay your freelance taxes on time? You might have to pay penalties and interest. If you can’t make your payment, request an extension here or contact the IRS to look into their payment plan options.
What About Estimated Quarterly Payments?
While some freelancers may simply file their annual returns each spring, many freelancers have to make estimated quarterly payments. Do you have to pay these quarterly taxes? If you expect to owe $1,000 or more, you’ll probably have to pay quarterly taxes.
Quarterly taxes are due, well, each quarter. You’ll have to download and complete Form 1040-ES along with the estimated tax payment. Quarterly IRS taxes are due on the following dates:
- April 15th
- June 15th
- September 15th
- January 15th
If any of these dates fall on a holiday or weekend, the deadline gets moved to the next business day.
How to File Freelance Taxes Step-by-Step
Once you know whether or not you qualify as a freelancer, it’s easy to start tracking your income and expenses in preparation for filing freelance taxes as a beginner. Now, with all of that information, a calculator, and perhaps the help of an online filing tool, it’s time to file your taxes! Let’s break it down step-by-step.
Step 1: Collect Your 1099s
As a freelancer, you’ll get (or request if they don’t automatically send it to you) Form 1099-MISC from each client you work with (as long as they paid you over $600 during the year). If you don’t get a 1099-MISC, you still have to pay taxes on the money you earned, but it’s just easier to calculate your total earnings with all of the forms together.
Haven’t received a 1099 yet? The IRS requires that companies send those about by January 31st each year, but if it hasn’t arrived yet, you might check your physical mailbox to see if it’s there or simply ask the clients to send you one.
Collect all of your 1099s and any other financial information you need to continue onto the next step...
Step 2: Calculate Your Deductions
Fortunately, you can reduce your tax liability with deductions, which is a massive benefit for anybody who works as a freelancer. Deductions are expenses that you paid out of your own pocket to run your business or side hustle. There are a number of deductions you can use, including:
- Self-employment tax deduction
- Home office deduction
- Office supplies
These are just a few of the more common deductions you can use to reduce your tax liability. Read more about the other ones here.
Step 3: Gather Your Tax Forms
Next, you’ll need to complete the tax forms for self-employment. This can include:
- Form 1040: This is the US Individual Income Tax Return Form, where you’ll report all of your earnings.
- Schedule C: This form is used to report the profit or loss of a company (which, in this case, is you!). Basically, it’s where you’ll report all of the expenses that you want to deduct from your overall income.
- Schedule SE: Schedule SE is used to report self-employment taxes.
Step 4: Submit Your Return to the IRS
There are two ways to complete your tax forms. You can do this online through the tax filing software, or you also have the option of downloading the paper forms directly from the IRS. We suggest using the IRS Free File tool or filing online via a platform like H&R Block or TurboTax. Why? They walk you through this process step-by-step while you’re filing so that you don’t make mistakes!
Step 5: Pay Your Owed Taxes
As a freelancer, you’ll absolutely owe taxes in some way or another. At the very least, you have to pay self-employment tax regardless of how much you could deduct in expenses. To pay your owed taxes, you can pay online via ACH direct deposit or send a personal check or money order to the IRS.
One thing to note here is that you may not have to make an additional payment when you file your annual return if you pay quarterly taxes. In rare cases, you may have even overpaid, which means you’ll actually receive a tax refund from the IRS.
Preparing to File Taxes as a Freelance
Learning how to file taxes as a beginner can seem overwhelming, especially if you worked hard for that money and don’t want to let it go. However, understanding how freelance taxes work allows you to feel confident and prepared while also ensuring you’re budgeting correctly so that you have enough to cover what you owe.
Remember that failing to file your taxes or filing them late will only increase the overall amount you have to pay, so go ahead and just plan on filing on time. If you’re having trouble making the payment, request an extension or ask about a payment plan.
Better yet, learn how to save, budget, and invest the money you earn throughout the year so that you’re able to grow that cash and use it to pay your tax bill.
Head over to our Learn section to find a course that looks interesting. Then start learning! It’s free. Always.