Tax Tips Every Freelancer Should Know
Share this Article
- All independent contractors should learn how to do taxes as a freelancer.
- Good records and software go a long way towards keeping freelancers organized.
- Finding the right business structure is key to maximizing tax benefits.
- Working with outside tax professionals can give freelancers peace of mind about their planning.
It's the perfect time to start or grow a freelance career. An Upwork survey of 1,000 hiring managers shows that 53% of businesses are open to using freelancers as a result of the pandemic. This means current contractors may see more business, and a new wave of freelancers may enter the market.
Working for yourself as a freelancer is an exciting prospect, but it's not just about breaking free of a boss and finding your dream clients. Running a business requires managing behind-the-scenes details, too, such as developing good strategies for setting aside, reducing, and paying taxes as a self-employed professional. Learning how to pay taxes as a freelancer is a crucial step for every self-employed contractor.
BestColleges.com is an advertising-supported site. Featured or trusted partner programs and all school search, finder, or match results are for schools that compensate us. This compensation does not influence our school rankings, resource guides, or other editorially-independent information published on this site.
Ready to Start Your Journey?
Set Up a Good Tax Savings Strategy
Being prepared and starting off on the right foot is one of the best tax tips for freelancers. To figure out how much to set aside for taxes, pick a percentage and stick to it. Personal finance expert Laura Adams advised that self-employed business owners set aside 25-30% of their earnings for taxes.
No one wants to be surprised by a massive tax bill with no savings. Setting aside a percentage of every dollar earned makes it simple to write a check for quarterly taxes and to cover any underpayments when filing annually.
The self-employment tax may surprise many freelancers. Planning for it can reduce anxiety on tax day.
"One of the most common things I see with freelancers is not realizing the tremendous tax benefits our tax code holds in the corporate tax election," said Todd Keffury, founder and lead financial planner of Cadenza Financial Planning. "Self-employment tax usually takes the biggest bite out of a freelancer's wallet every year as they are forced to pay both the employer and employee's portion of payroll taxes (around 15.3%)."
Keep Excellent Records
Invest in good accounting software early on because it can help you come tax time. It may be helpful to use software that connects to your business bank account and third-party processors, such as Stripe or PayPal.
Each month, set aside time to match up checks, ACH deposits, and other incoming funds in your accounting software. Tools like Xero, GoDaddy Bookkeeping, Wave, and Quickbooks can help a freelancer set up their accounting quickly and easily.
Keeping these records can simplify reporting your earnings to the IRS and your state revenue office as you figure out how to pay taxes as a 1099 contractor. You can also use this information to make important business decisions because it shows exactly what you've earned and spent each year.
Prepare to Pay Quarterly Estimated Taxes
Freelancers expected to owe at least $1,000 in taxes must pay quarterly estimated taxes. This is where good records and accounting software come in handy.
If you previously filed taxes as a freelancer, your accountant might provide you with credits based on your previous year of income. You can use those credits — or run your own numbers — to pay your estimated taxes.
You should pay quarterly estimated taxes to keep on top of your tax obligations. If you fail to pay IRS quarterly payments, you could receive a big bill come tax time or even tax penalty payments.
Learn About Deductions
Freelancers are eligible for many deductions. This can significantly lower the amount you owe in freelance work taxes when added up over a year.
If you're keeping good records, it should be easier to create deduction categories you can review and total at the end of each year. Some common deductions for freelancers include:
A portion of their internet bill based on how much is used for business purposes
A portion of rent or mortgage payments based on the square footage of their home office compared to the rest of their living space
All educational materials, including books, courses, coaching, and conference fees
Fees for software used to run the business, such as invoicing or accounting tools
If you have questions about whether something is deductible, ask your accountant for help.
Get a Separate Business Bank Account and Credit Card
Treat your business like a business from day one. Get a business bank account and credit card. Receive payments only to that account, and don't use your personal funds to purchase business-related items. This can help you have cleaner records and avoid the appearance of co-mingling funds.
Pay yourself from the business bank account to your personal bank account. Don't forget to set aside a portion of your income for taxes before making any payments to yourself.
If you do have an LLC or other formal name for your business, make sure that's the name on the relevant bank account or credit card.
Structure Your Business Properly
Unless you file official paperwork stating otherwise, your business is structured as a sole proprietorship by default. There's no legal or tax benefit to operating as a sole proprietor, but it's a simple way to get started as a freelancer.
According to CPA George Birrell of Taxhub, it can be a mistake to stick with a sole proprietorship over time.
"The most common mistake we see with freelancers who are new to the game is not properly structuring their freelance business," Birrell said. "The gold standard entity structure for freelancers is always the LLC. The point of confusion for freelancers is what state to form the LLC in and if they should convert to an S-corp. This is the more nuanced question and can vary widely depending on individual circumstances."
Taxhub offers an S-Corp calculator to help freelancers determine if that structure is more appropriate for their situation.
Keffury agreed with this logic. "Don't assume the corporate tax election is only reserved for big-money businesses and ultra-high earners," Keffury said. "If you are a freelancer netting more than $40,000 per year, it's likely worthwhile to consult a professional that can model out what this looks like and whether this structure makes sense in your particular case."
Hire a Good CPA
A good CPA is worth their weight in gold for a freelancer. They'll file your taxes for you and can also represent you and provide evidence to the IRS if you get audited. As your company grows, your tax situation might get more complex.
It's very helpful to have a professional at your side to assist you with any unexpected situations that arise. They can also teach you more about how to plan for your future, such as what amount to set aside for retirement.
An experienced CPA who understands self-employed tax issues can help you leverage every possible deduction come tax time. They can also serve as a vital resource for making big decisions in your business as your revenue grows.
Understand 1099 Requirements
To know how to file taxes for freelance work, you need to know about 1099s. This term is used to describe an end-of-year tax reporting form you'll receive from certain clients.
When you work with a new freelance client, they might ask for a W-9 form for their files. If you earn more than $600 in a calendar year with any given client, you should receive a 1099-NEC form from that client the following January with a total of all your earnings. Keep a running list of every client you expect to get a 1099 from and cross-check what they send you with your own records for freelance taxes.
However, there are a few exceptions to the 1099 rule. Overseas clients are not required to send U.S.-based freelancers a 1099-NEC. Also, if your clients pay you through certain third-party processors like PayPal, those processors might send you one 1099-K for all income earned in a calendar year.
This exception eliminates the need for your clients who pay through that processor to send you a separate 1099-NEC. Inform your clients about this, so the IRS doesn't think you under-reported your income on your freelance taxes.
Frequently Asked Questions About Taxes for Freelancers
How much money do you have to make to file taxes?
According to H&R Block, you must file taxes if you're single, under age 65, and earn more than $12,550 in a year. If you're married and filing jointly, under age 65, and earn over $25,100 per year, you need to file taxes, too. In addition, if you're single, over age 65, and earn over $14,250 annually, you must file a tax return. If you're married, filing jointly, and both you and your partner are over age 65, you must also file a tax return if you earn more than $27,800 per year.
Do I have to report freelance income?
As a self-employed freelancer, you must report freelance income earned in the previous calendar year. Clients and third-party payment processors who issue you a 1099 will also send a copy of that form to the IRS, and you must report that freelance income on your taxes as well.
How do I calculate freelance taxes?
Setting aside 25-30% of your income is recommended when saving for freelance taxes. Your CPA or other tax professional can help you calculate all your income, expenses, deductions, and credits to ensure you pay the right freelance taxes for the previous year. You can also use tools like TurboTax to help calculate your freelance tax responsibility.
With Advice From:
After earning his master's in taxation and scoring in the top 10% of his class on his CPA exam, George Birrell began his career in public accounting. Twelve years in, he transitioned into controllership for an engineering firm. Even as his career evolved, it was never far from George's mind that when it came to consumer tax prep, there had to be a better way.
When he found that way, the idea behind Taxhub took shape. Determined to bring customers a better tax experience, George began discussing his idea with an equally passionate creative director, who partnered with him to help bring this idea to the masses.