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This article was fact-checked by our editors and Christina Taylor, MBA, senior manager of tax operations for Credit Karma Tax®. It has been updated for the 2019 tax year.
There’s a lot to love about the freelance life: getting to choose the type of work you do, who you work with, and when and where you get the job done.
But one aspect of freelancing is not so fun: paying all your own taxes.
Filing and paying taxes as a freelancer is entirely different from paying income taxes when you’re employed by someone else. This article will look at those differences, the tax forms you’ll need to file and will provide some money-saving tax tips for freelancers that can help keep more of your hard earned-money in your pocket.
- The basics: Paying taxes as a freelancer
- Common deductions for freelancers
- Tax forms you need to file as a freelancer
- Common tax mistakes freelancers make
The basics: Paying taxes as a freelancer
When you’re employed by someone else, your employer withholds federal and state income taxes, Social Security and Medicare taxes from your wages. Your employer takes care of paying the tax directly to the government and even kicks in half of the amount owed on Social Security and Medicare taxes.
Your employer calculates how much to withhold based on how you filled out your W-4 when you first started working. At the end of the year, when you file your tax return, you simply report the amount of federal and state income taxes withheld by your employer, which you can find on the W-2 supplied by your employer.
If your employer withheld more tax than you owe, you’ll get a refund. If it withheld less than you owe, you’ll need to pay the additional tax.
When you’re self-employed, your clients and customers aren’t required to calculate or deduct any taxes. You’re responsible for estimating and paying them on your own. You may be responsible for paying up to three separate taxes as a freelancer:
- Federal income taxes
- State and local income taxes
- Self-employment tax (the self-employed person’s version of Social Security and Medicare tax)
The amount you’ll owe depends on a lot of different factors, including your federal income tax bracket, the city and state in which you live, your net income from freelancing and whether you have any taxes withheld from an employer in addition to your freelancing income.
Those calculations are beyond the scope of this article, but no matter how much you earn from freelancing, you can reduce the amount you’ll owe by taking advantage of deductions.Learn about deductions for self-employed people
Common deductions for freelancers
The type of deductions you’ll claim as a freelancer depends on the type of work you do.
To be deductible, the IRS specifies that a business expense needs to be ordinary and necessary. The expense should be one that is common and accepted in your trade or business. And, it should be necessary in that it helps you with your business.
So this criteria simply means deductible business expenses are things other business owners in your industry typically purchase that are required for your business to succeed. For example, a freelance graphic designer would probably buy graphic design software, office supplies and advertising.
Here’s a list of common expenses that freelancers claim. These may not all be directly applicable to your business, or you may have some that are not included here.
- Bank fees
- Car and truck expenses (including gas, mileage, repairs and insurance)
- Computer hardware and software
- Contract labor
- Dues and subscriptions
- Education and training
- Home office
- Insurance (general liability, workers’ compensation, property damage, and professional liability)
- Legal and accounting
- Meals and entertainment
- Office expenses
- Taxes and licenses
Tax forms you need to file as a freelancer
When you begin freelancing, you’ll likely become acquainted with these tax forms. Some you’ll receive from other parties, some you’ll need to complete.
Your clients may ask you to complete Form W-9. This form ensures that your clients have your correct name, address and Taxpayer ID number so they can issue you and the IRS a Form 1099 at year end. You can use either your Social Security Number or an Employer Identification Number as your taxpayer ID.
At the end of the year, any business that paid you $600 or more is required to issue Form 1099-MISC that shows the total payments made during the year. One copy should be sent to you, and another copy goes to the IRS.
If you hire any independent contractors to work for you and pay them more than $600 in a calendar year, you may be required to issue a 1099-MISC as well.
If your business is set up as a sole proprietorship or single-member LLC, you’ll report your business’s income and expenses on Schedule C, which should be attached to your individual tax return, Form 1040.
If you earn more than $400 in self-employment income during the year, you’ll need to pay self-employment taxes. Those are calculated and reported on Schedule SE, also attached to your individual tax return.
If you will owe at least $1,000 in taxes for the year, you may have to make estimated quarterly payments. Those payments are calculated on Form 1040-ES. The form also includes vouchers to send to the IRS along with your estimated tax payments.
Common tax mistakes freelancers make
Filing tax returns as a freelancer is complex. Make sure you’re not making these common mistakes.
Wrongly claiming the home office deduction
The home office deduction is a source of confusion for many freelancers. Simply having an office in your home is not enough. To be eligible for the home office deduction, you must use the area regularly and exclusively for business. Your home office does not need to be a separate room in your house, but the space does need to be used solely for business.
Keeping shoddy records
Most tax professionals recommend setting up separate checking and credit card accounts for your business to help keep personal and business expenses separate. However, don’t rely on those checking or credit card account statements as your sole record of business expenses.
If you are ever audited by the IRS, the auditor will also want to see supporting documentation, such as invoices, canceled checks or receipts.
This is especially important when it comes to expenses for travel, meals and entertainment. Because these categories are prone to abuse, the IRS requires supporting documentation showing the amount, date, place and business purpose for the expense.
Not knowing when to get help
Filing taxes as a freelancer is more complex than filing if you’re employed by someone else. While that added complexity doesn’t mean you can’t file your own taxes, it may still make sense to get help.
Free online tax preparation services like Credit Karma Tax® can help walk you through the process of filing your federal and state income taxes as a freelancer. Keeping good records and familiarizing yourself with tax law and applicable tax forms could make the process of filing your taxes go smoothly.
However, if your situation is particularly complex, involves tax returns for multiple states, or you don’t have the time to do the job well, you may consider hiring a professional to help. If you do decide to hire a professional, it’s a good idea to find someone that specializes in self-employed individuals. Also, look for someone who’ll be available to answer questions throughout the year.
Try to look for someone who is certified as a public accountant or as an enrolled agent. Additionally, steer clear from professionals who base their fees on how much of a refund they can get you — because they may be more likely to claim deductions you don’t deserve and land you in hot water.
Tax season comes just once a year, but it’s a good idea to start thinking about your tax situation long before Tax Day arrives. Have a plan, keep good records and get help when you need it. Having a basic understanding of filing taxes as a freelancer is a crucial part of making your freelance life a success.
Christina Taylor is senior manager of tax operations for Credit Karma Tax®. She has more than a dozen years of experience in tax, accounting and business operations. Christina founded her own accounting consultancy and managed it for more than six years. She co-developed an online DIY tax-preparation product, serving as chief operating officer for seven years. She is the current treasurer of the National Association of Computerized Tax Processors and holds a bachelor’s in business administration/accounting from Baker College and an MBA from Meredith College. You can find her on LinkedIn.