How To File Freelancer Taxes, The Bane Of Every Freelancer's Existence
Being a freelancer has a lot of perks, including having a flexible schedule and getting to work in pajamas. But when you’re self-employed or doing contract work, figuring out money matters can be a major pain, perhaps no more so than when it comes to the eternal question: “For the love of everything good, decent, and worthwhile in this world, how does a freelancer file taxes?!” Friends, I know your pain.
Most people with salaried 9-to-5 jobs get taxes automatically deducted from their paychecks. They get a W2 at the end of the year with information about how much they’ve earned and what they’ve already paid, and they use this info for their tax forms. When you are a freelancer — or what the IRS classifies as an “independent contractor” — the people paying you don’t take taxes out of your wages. However, that income is still subject to taxes, and it’s up to you (and perhaps a qualified tax professional) to figure out how much you need to put aside and how to pay it.
The first word I would use to describe taxes for freelancers is “complicated.” When you also consider how taxes shift when you have clients in multiple states and countries, I would also add the words “completely” and “INSANE.” Freelancers are subject to different tax rules than salaried workers, and understanding the ins and outs of the system is a real challenge. I’ll walk you through the basics here, but keep in mind that, because freelancers all have job setups that are unique to them, your individual taxes will reflect your own circumstances.
I know this is a lot to take in, so I’ve interspersed the tax info with some relaxation aids. Take a deep breath and strap yourself in. We’re gonna get through this.
Know your paperwork.
If you’ve ever had a regular part-time or fulltime job, you’re probably already familiar with the W-2 , a form issued to you by your employer at the end of January every year. The W-2 includes info about how much money you’ve made and how much has been withheld for taxes. You use the information from this form to file your taxes in April.
For freelance work, you receive payment from your client or employer with no money taken out. If your employer has paid you more than $600 during the year, he or she will submit a 1099 form that will go to both you and the government to report that payment. Like a W-2, you’ll get your 1099 forms from your clients at the end of January and use that info to file your taxes. However, even if you don’t get a 1099 from a client — because they paid you less than $600 or they just didn’t bother to file — you still need to report that income in your tax return and pay taxes on it.
When you file your annual taxes, you’ll need a few forms. You’ve probably already encountered a 1040 form before. This is the form that most people use to file their taxes; you’ll use it to calculate how much you owe overall. But, as a freelancer, you’ll also need a couple of others:
- Schedule C (or a Schedule C-EZ, if you’re eligible): You’ll use a Schedule C to calculate how much money you made during the year, minus any business expenses. The result will be your net profit for the year. If you have two or more totally different self-run business — for example, if you make money as a freelance writer and making wedding cakes from home — you’ll need to file more than one Schedule C.
- Schedule SE: You’ll use your results from your Schedule C on the Schedule SE to calculate your self-employment tax (more on that below).
Take a little break. Let yourself fall into the depths of this puppy's eyes:
Keep good records.
Don’t rely on clients to submit accurate 1099s, or on your own memory to be able to recall all of your income sources for the past year. You should keep track of all of your jobs, with info about who the clients were, how much they paid you, when you received payment, and any business expenses you incurred.
Figure out how much you need to put aside for taxes.
As a freelancer, you don’t have an employer automatically deducting taxes for you, so it’s important that you figure out how much of your budget needs to be devoted to taxes and that you put that amount aside. Laura Shin at Forbes recommends that you begin by estimating your taxes at 30 percent of your income; however, she stresses that it’s important to meet with an accountant to figure out a more exact percentage. Doing so will help you to avoid running into trouble with a sudden lack of funds come tax season.
Pay self-employment tax.
When you are a freelancer, you’ll pay taxes on your income, but you’ll also be subject to self-employment tax. When you’re employed by a company, the company takes out a certain percentage of your wages to pay Social Security and Medicare taxes. What some people don’t realize is that the company also pays Social Security and Medicare taxes for you. When you become a freelancer, you have to start paying self-employment tax, which covers both the money that would have normally been taken out of your wages by an employer and the money that your employer would have paid on your behalf — So if you’re used to paying taxes through an employer, you may be surprised to find that you owe these extra fees. In 2015, the self-employment tax for people earning less than $118,500 a year was 15.3 percent.
Now, before we move on, take a breath and imagine frolicking with the unicorns:
Decide what counts as a “business expense.”
Your total tax payment will be calculated according to your net self-employment income, which is made up of how much money you made during the year, minus business related expenses. Because your expenses essentially aren’t taxed, it’s important for you to figure out exactly what they are. According to the IRS,
To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business.
Business expenses will vary from field to field. In some cases, freelancers may be able to deduct partial housing costs (if they use parts of their homes as offices), expenses incurred through work-related travel, continued education in their professional fields, and health insurance premiums.
You should take advantage of deductible business expenses as much as you can so that you can minimize your taxes. That said, be careful to keep meticulous records of your expenses, and don’t exaggerate about what your expenses are; if you start trying to claim your whole house as a business expense, for instance, you could get in trouble with the IRS.
Pay quarterly estimated taxes
OK, this one's a doozy, so we're going to start with some sweet waterfall action:
Aaaaah. So here's the story on estimated taxes: When you have a salaried job, your employer pays taxes for you throughout the year. When you’re a freelancer or self-employed, the government still wants money from you at regular intervals, which means that you may need to pay estimated taxes four times a year. If you wait to pay all of your taxes in one big lump in April, you may be subject to a penalty from the IRS.
Before you get too freaked out, note that not every freelancer has to pay quarterly estimated taxes. You need to pay them if you expect to pay more than $1,000 in taxes this year or if you paid more than $1,000 in taxes last year. If you had no tax liability last year, you don’t need to pay them. If you also have a part-time job that comes with a W-2 (as many freelancers do), then you might not need to worry about estimated taxes; according to Laura Shin at Forbes, the money being taken out of that part-time paycheck may be enough to cover you, and if it’s not, you can ask that a greater percentage of your income be withheld for taxes. (You do this by filing a new Form W-4 and indicating that you want additional money withheld.)
If you do need to file estimated taxes, you do so by using Form 1040-ES. The IRS says that you calculate your estimated taxes by figuring out “your expected AGI [adjusted gross income], taxable income, taxes, deductions, and credits for the year.” You can also use your taxes from last year as a guide; it may be well worth consulting a pro to get the numbers right. Estimated taxes are due on the 15th of April, June, September, and January (Note that these dates are not spaced regularly throughout the year).
Hire a professional
Accountants don’t come cheap, but paying taxes as a freelancer is so complicated that it’s worth seeking professional help if you possibly can. Sophia Bera, founder of Gen Y Planning, told Forbes that freelancers should always work with tax professionals (Bustle’s own JR Thorpe agrees that freelancers should get accountants ASAP). Try to seek out someone who specializes in working with self-employed people and small business owners. It might hurt to shell out cash for an accountant at first, but, come tax season, you’ll be thrilled to have someone dig you out of the mire.
Whew! We made it! Now soothe your soul with some happy little trees: