How Do Taxes Work When You’re a Freelancer?
When you work full-time, taxes are simple. Your employer takes out or “withholds” money from each paycheck throughout the year. In January, your employer gives you a W-2 tax form showing how much you earned and how much was withheld to cover federal and state taxes, medicare, and social security.
You can simply give that W-2 form to an accountant and you’re done. You can also file your own taxes using an online tool such as TurboTax.
But when you’re a freelancer, taxes become much more complicated.
In this article, I’ll explain what freelancers living in the U.S. should know about taxes in the simplest way possible. But there’s a lot to cover, so bear with me.
If you still have a full-time job and only freelance on nights and weekends, everything in this article still applies to you!
A Birds-Eye View
First, let’s get a birds-eye view of how freelance taxes work so you can better understand the rest of the details in this article.
Tax Forms
When you start a freelance project, send your client a completed W-9 form. This tells the client what information to include on your 1099-MISC form. The 1099-MISC form is just a receipt showing how much the client paid you and proving to the government that you earned income from them.
Paychecks
Unlike an employer, freelance clients don’t take any money out of your paycheck. You get paid the full amount, but you still need to pay taxes on that income. It is solely your responsibility to calculate and pay these taxes. That means you need to take a portion of each payment you receive as a freelancer and save it for taxes.
Savings
The amount you need to save will depend on your income tax bracket and the state you live in. You’ll pay more money in taxes as a freelancer since there’s no employer to help subsidize your Medicare and Social Security taxes.
Estimated Taxes
Four times a year, you need to pay estimated quarterly federal taxes to the IRS and state taxes to your state (unless you live in a state with no income tax). At tax time (April 15), you’ll have to pay the difference if you underpaid, or you’ll receive a refund if you overpaid.
Filing
At the end of the year, each of your freelance clients is obligated to send you a 1099-MISC form showing how much they paid you (just like a receipt). You can collect all these 1099-MISC forms and give them to an accountant. If you’d rather file taxes on your own, check out this comprehensive article from QuickBooks!
Deductions, Expenses, and Write-Offs
As a freelancer, you can take a standard deduction or submit a list of itemized deductions (whichever amount is more). These deductions are expenses (money you spent on eligible purchases) that lower your taxable income.
Deductions Example
So if you’re a web designer who got paid $50,000 from freelance clients and you spent $5,000 on computer equipment, your total taxable income would be reduced to $20,000.
Still with me? Let’s look at how freelance taxes work in a little more detail!
Definitions
In the eyes of the government, freelancers aren’t called “freelancers”. Instead, they’re referred to as sole-proprietors or independent contractors. This is important to know so you’re not confused when filling out tax forms and can’t find the word “freelancer”.
Gross income is the money you get paid before taxes are taken out. This is the amount your charging and how much the client is paying you. Net income is the amount you actually get to keep for yourself or your business after saving money for taxes.
A W-9 tax form is a document you send to each of your clients. It provides them with the correct information to use on the 1099-MISC form. The 1099-MISC tax form is a receipt showing how much that client paid you throughout the year. The client must provide you with this form by January 31st of the following year.
Deductions, expenses, and write-offs are all synonyms for one another. These refer to eligible purchases you can use to lower your taxable income.
Understanding Self-Employment Tax
In the United States, part of everyone’s income goes towards supporting Social Security and Medicare. This is called a FICA tax (Federal Insurance Contributions Act) and is 15.3% of your income. When you are an employee, you pay 7.65% of this tax and your employer pays another 7.65% for you.
However, when you’re self-employed, there is no one else to pay or “subsidize” the employer’s 7.65% portion. So you pay the full 15.3% yourself, which is why it’s nicknamed a “self-employment tax” and why you pay more in taxes as a freelancer.
The official name for this tax is SECA tax when you’re a freelancer (Self-Employed Contributions Act).
Estimated Quarterly Taxes
When you get paid as a freelancer, your payment is gross income. That means the client pays you the full amount and doesn’t withhold any money for taxes. You’re responsible for paying estimated federal and state taxes four times a year. These are known as estimated quarterly tax payments.
So the first thing you should do each time a client pays you is: save money for taxes. Otherwise, you may be surprised by a huge tax bill in April. The amount you should save for taxes can vary depending on your tax bracket and what state you live in.
These payments can be tricky to calculate, so it’s best to work with an accountant. It’s ok if you don’t get the amounts exactly right. These are called estimated payments for a reason, but they need to be close.
This handy tool can help set your expectations for how much you’ll owe in taxes. If you’re still employed and have W-2 income, it will account for that as well.
Note: The IRS reserves the right to penalize you anywhere from 6% to 8% of the amount that you underpaid, according to QuickBooks.
If you didn’t pay enough throughout the year, you’ll have to pay the difference at tax time. If you overpaid, you’ll get a refund (or the overpaid amount will be applied to any taxes you owe). Here are the due dates for each estimated tax payment you need to make:
- Quarter One (Jan. 1 – March 31): Due April 15
- Quarter Two (April 1 – May 31): Due June 15
- Quarter Three (June 1 – Aug. 31): Due September 15
- Quarter Four (Sept. 1 – Dec. 31): Due January 15 of the following year
Note that the exact dates may change slightly each year as deadlines never fall on a weekend.
Example:
If you’re single, living in New York state, and earning between $40-$80k as a freelancer, you might owe 22% to the IRS, 6% to New York state, and 15.3% extra to cover Social Security and Medicare. That means you should be taking 43% of every paycheck and saving it for taxes. So if a client paid you $10,000, you should save about $4,300 for taxes. Your only get to keep $5,700.
You can look up the federal income tax rates here and the state income tax rates here. If any of this makes you feel confused or outraged, consider voting for politicians who want to lower your taxes, not raise them.
What are 1099-MISC and W-9 Forms?
The U.S. government wants to know when money is exchanged between two parties. When a client pays you for a project, they report that on their taxes as an expense using a 1099-MISC form.
A 1099-MISC form is essentially just a receipt from the client that shows how much they paid you. Your client is responsible for providing you with this form by January 31st of the following tax year. As a freelancer, you’re responsible for claiming that same amount on your taxes as income from that freelance client.
A W-9 form is just the official document you use to tell the client what information they should include on your 1099-MISC form. You do not submit the W-9 form to the IRS. Instead, you send a completed copy to each freelance client you work with. You can download a blank W-9 tax form from the IRS website.
Pro Tip: Keep a completed W-9 form in Google Drive or Dropbox and send your client a link so they can easily download it.
It’s important to note that these forms are only necessary when you’re working with the client directly. If you’re doing freelance work through a platform like UpWork or Fiverr, you’re technically working for them. That means they will likely send you a single 1099-MISC form at the end of the year.
Deductions, Expenses, and Write-Offs
Deductions, expenses, and write-offs are all synonyms for one another. These all refer to eligible business purchases you can use to reduce your taxable freelance (1099-MISC) income.
Eligible purchases are pretty much anything you spend money on to help you run your freelance business. So while you’re taxed more as a freelancer, you can also take advantage of deductions. There are two types of deductions:
- Standard Deductions
- Itemized Deductions
You can choose which to apply to your taxes each year and yes — you can choose whichever is more beneficial to you! However, you can only pick one. You aren’t allowed to take a standard deduction AND submit itemized deductions.
Full-time employees cannot take the same deductions as freelancers.
Standard Deductions
Standard deductions are fixed amounts that reduce your taxable income — no paperwork or “itemizing” necessary. As of 2021, these are the standard deductions you can instantly apply to your taxes:
- Single: $12,400
- Married Filing Jointly: $24,800
- Married Filing Separately: $12,400
- Head of Household: $18,650
If you spent less than these amounts on eligible business expenses, take the standard deduction. If you spent more than these amounts, you should itemize your deductions instead.
Itemized Deductions
Itemized deductions are the individual eligible business expenses you tally up or “itemize” to reduce your taxable freelance income.
The general rule is that if an expense exists for something that benefits your business and you can provide documentable evidence, you can “write it off” as a business expense. Eligible business expenses or “deductions” include:
- Computer Software & Online Tools
- Computer Hardware (such as a laptop)
- Home Office Expenses
- Internet & Cell Phone Bill
- Meals
- Travel & Vehicle Use
- Rent
- Business Insurance
- Professional & Legal Fees
- Advertising
- Retirement Contributions
- Training & Education
- Charitable Contributions
- Home Mortgage Interest
- Medical & Dental Expenses
- Miscellaneous Business Expenses
- Self-Employment Tax
Unlike the standardized deduction, itemizing requires you to track all eligible business expenses throughout the year. That’s why it’s best to separate your personal and business expenses and use professional invoice and tracking software such as QuickBooks or FreshBooks.
You can also track your expenses in a spreadsheet if you’re not ready to pay for a robust software solution:
Example
Let’s say you’re a single (unmarried) web designer, live in New York state, and earn $50,000 of freelance income. You’d fall into the 22% federal tax bracket, owe 6.21% to New York state, and another 15.3% in self-employment tax.
You’ll pay a total of 43.5% in taxes. Ouch.
But let’s also say that you had $15,000 in eligible business expenses. You would reduce your taxable income from $50,000 to $35,000, which would also lower your federal tax bracket to just 12% instead of 22%.
Now you’ll pay a total of 33.5% in taxes. A 10% tax savings!
It’s in your best interest to take advantage of as many deductions as possible throughout the year and there’s no limit to how many you can take.
If you earned $50,000 of freelance income and spent $50,000 on business expenses, you would reduce your taxable income to $0, but you also wouldn’t have earned any money — because you spent it all on the business!
Separate Your Personal & Business Finances
There’s nothing wrong with using your personal checking account for freelance income and expenses. However, this can make a mess of your finances and make it difficult to know how much you earned and how much you spent on business expenses.
Instead, I recommend opening a separate checking account and at least one additional savings accounts. This does not have to be a business checking account, it can simply be a second personal checking account. Some banks even allow you to open multiple savings accounts online!
Then, have all your freelancing income deposited into your “business” checking account and use the additional savings account to save money for taxes!
You can learn more about exactly how to set up your bank accounts in the article linked above.
Full-Time + Freelance Income
If you’re freelancing on the side and still have a full-time job, everything in this article still applies to you. However, the tax calculations will become more complex since you’re mixing W-2 and 1099-MISC income along with any eligible business expenses.
That’s why it’s best to work with an accountant and not attempt to file your taxes on your own. If you have questions about how to find the right accountant or about how freelance taxes work, join The Freelance Institute!
You can post as many questions as you like and get answers directly from me and other freelancers from all over the world. There’s nothing else quite like it!
Want to form an S-Corp or LLC?
If you’re interested in forming a legal business entity such as an LLC or S-Corp, check out the article below to learn why I formed an S-Corp.
Looking for more details?
If you want to learn more about various types of business entities, tax forms, filing, and how to prepare your taxes accurately, check out this great article from QuickBooks: The Complete Guide to Filing Self-Employment Taxes
Last updated on April 8th, 2021
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