There are a ton of reasons to love freelancing. However, when it comes to taxes, things can get a bit complex. The IRS sees you as self-employed if you’re a freelancer. So, any earned income has to be filed (for tax purposes) as if you are a business owner.
In this article, I will cover what you need to know about freelancer taxes, including the deductions you can (and should) be taking, the forms you need, and any additional information that will be helpful during tax time. Let’s dive right in.
What is "Self-Employed?"
For the IRS, the difference between a freelancer and someone who is self-employed is semantics. But for the sake of the article, let’s unpack this a bit. A self-employed worker is typically anyone who considers themselves the owner of their own business.
So, if you determine what you do, how you do it, and what hours you spend doing it, you're probably self-employed. Think of a founder of a startup or a small business owner.
Now, freelancers will often call themselves self-employed (because technically, they are). The IRS sees them this way, plus it often helps when a freelancer is negotiating with a client.
Think about it would you rather hire "Joe the freelancer who does what he wants when he wants to" or "Joe's Graphic Design?" Regardless, "self-employed" merely signifies that the person is not traditionally employed.
So what does "freelancer" mean then?
What is a Freelancer?
Freelancers are self-employed and are often regarded as contractors. One key difference between traditional self-employment and freelancing is that freelancers will frequently tackle numerous clients' jobs.
Using my example above, "Joe's Graphic Design" might focus on the same services and sell those services on repeat to clients who need them. "Joe the freelancer" might do various graphic design jobs for different price points and multiple types of clients.
A freelance graphic designer I know, for example, does everything from logo design to UX design on websites. It's really whatever the client needs.
So, there are no hard and fast rules about the differences, but there tend to be indicators. The most significant distinction between the two is the amount of independence each one has. Someone who is self-employed runs a business that focuses on a specific set of products or services and typically in a particular market (but not always).
On the other hand, freelancers are "client- and market-agnostic," which means they'll go wherever the work/clients are. As you can see, the line is incredibly fine between the two, but hopefully, this was a helpful comparison.
Taxes for the Self-Employed
Being a freelancer has plenty of perks. But things can get stressful when it comes time to do your taxes. On top of any standard income tax, you need to pay self-employment tax as a freelancer. This year, the self-employment tax rate is 15.3%.
Why do freelancers need to pay this tax? It’s akin to the taxes you pay as an employee of a company— Medicare and Social Security—only as an employee, this is taken out automatically.
One interesting tidbit, though, is that freelancers are legally considered both employers and employees. Because of that, this tax accounts for both.
What Taxes Do I Pay on Form 1099?
In most cases, a freelancer will be considered a 1099 contractor when it comes to taxes. That means you’ll file a 1099-MISC form at tax time. However, if you form a corporation, such as an LLC, you can avoid 1099 contractor status.
And like I mentioned above, freelancers (1099 contractors) are considered self-employed by the IRS. Meaning, if you made more than $600 as a freelancer, you’ll have to pay self-employment taxes and file Form 1099.
Remember, this tax equates to roughly 15.3%. And your individual income tax bracket based on your income can determine how much cash you need to set aside for taxes. It's smart to set money aside as you earn it because there's a chance you'll need to pay estimated taxes every quarter.
To figure out how much you’ll owe, you can use the Schedule SE form to estimate your freelancer tax. You’ll then report this amount on Form 1040 come tax time. Based upon your circumstance, you may even be able to deduct the employer equivalent part of your self-employment tax on your 1040, which equates to up to 50%.
Remember, though, self-employment taxes are NOT based on your gross income. They're based on your net income (hence the emphasis on finding deductions). So at tax time, you'll take your gross and subtract any deductions (often business expenses) to get to your net income number (which will then be taxed).
About Those Deductions...
Speaking of deductions, your goal as a freelancer (like an employee) is to reduce your taxable income as much as you can. Remember that you're going to have more expenses as a freelancer than you would as a regular employee.
You'll need to know where you can deduct (or use good tax software, as I'll talk more about below). Just don't forget that this can't be a free-for-all. You can only deduct business expenses that are "necessary and ordinary" for your business to operate.
If you're unsure of what constitutes a deduction, check with a tax professional. Still, in most cases, a freelancer can deduct expenses like these:
Meals and Travel
In short, you can deduct meals and travel as a freelancer. But, it can be complicated to ensure you're doing it in the right way. For example, if you're a service business, you're allowed to deduct mileage for travel to a particular job. But, you can't deduct travel to your office.
Meals are deductible, and thanks to the Consolidated Appropriations Act, you can now deduct 100% of meals provided by a restaurant. The 100% rate is set to expire in 2022, so get those meal deductions in while you can.
Travel expenses are deductible, but you must be traveling primarily for business. If you have a business conference in Hawaii and spend five days working and the last day lounging around on the beach, that’s still a business trip. If you attend the conference for three days and spend the other three jet-skiing and drinking, that’s a vacation. The rules are a little more relaxed for international travel, you just have to spend at least 25% of your time engaged in business.
Because many freelancers work at home, the home office deduction is quite popular. The IRS permits you to write off everything from the cost of your lease to utilities for parts of your house that you use in the office.
The catch is that your office area has to be exclusively utilized for your self-employment work, so you can not "borrow" your kitchen from 9 to 5 and call that space your office.
If your freelancing requires you to upskill, then you'll be happy to know that much of your education costs can be deducted.
This is awesome for most freelancers. As an example, I do a lot of digital marketing for clients. When I was first getting started, taking courses to learn tricks to make me more efficient was invaluable. And all of that was tax-deductible.
And suppose you want to take it to the next level and get a certification or something similar? In that case, you can typically deduct these costs, too.
Just make sure that the courses, books, certifications, etc., relate to the work you do. For me, in digital marketing, it wouldn't make sense for me to take a class (and later try to deduct that class's cost) on balloon art. Though, that does sound fun.
When I first started freelancing, I needed things like a laptop, printer, and other things that we take for granted as an employee to have to buy on our own.
Thankfully most of this stuff is tax-deductible as long as it's being used for your business, of course. Just make sure you're buying (and deducting) things you need to do your freelance work.
Again, I couldn't deduct the cost of a new espresso machine as a digital marketer (unless I had a compelling case, of course...). In all seriousness, you can only deduct business equipment expenses that enable you to do your work.
What Documents Do I Need?
Now that you have some of the basics down, let's unpack some of the documents you should have handy when you do your freelance taxes.
Form 1099-MISC, more typically referred to as a 1099, is the central income tax form for most freelancers. Any client who compensates you $600 or more in the calendar year must send a 1099 declaring your earnings by January 31st.
For most freelancers, the 1099 is the simplest way to add up their annual income in their tax return. In most cases, you won't need to include your 1099-MISC when you file your taxes. However, I always recommend hanging onto them for at least 5 years after you file for your records.
Also, anything less than $600 still has to be reported to the IRS. Don’t think it’s a freebie. You just don’t need a 1099 sent to you. But you’ll have to report that income. And remember to track this information somewhere on your own (since you won’t get 1099).
Your Financial Records
Again, as a freelancer, you need to make sure you’re keeping track of all your income and expenses. This helps you know if you’ve made or lost money for the year and to what degree. You can certainly do this by hand, but I don’t recommend it.
Depending on your freelance business scale, you should at the very least use bookkeeping software. If you are making a decent amount of money, look into Bench, which provides you with an accountant that handles all your financials.
Regardless of what you choose, always keep hold of your bank statements, credit card statements, and any other financial statements related to your business for a minimum of 5 years.
You never know when you’ll need it. And this is yet another reason why it’s important to have a separate business bank account, even as a freelancer. Check out our best business banks for more information on this.
I'll be the first to admit that keeping and tracking receipts are frustrating. But if you're doing a lot of business or making a lot of transactions, it's smart to keep all receipts. This way, you can track every expense you have during the year.
Remember, receipts tell you when the transaction occurred, who the vendor was, and (most importantly) how much was spent. If you're ever audited, you'll need to pull receipts to prove expenses.
Some software has a built-in receipt tracker, so you can snap a picture of the receipt with your phone and keep it for as long as you need. You can also upload e-receipts (if you purchase something online, for example) easily.
If you are using your car for your business, for instance, to reach clients’ residences or office buildings you can deduct vehicle expenses and even miles.
Monitor your car costs and business miles throughout the year. These costs need to be separate from the personal use of your car or truck. You can look at the IRS table of mileage rates for assistance in figuring out your mileage deduction, along with more details about this deduction.
Form 1040-ES is needed to calculate and pay your estimated income taxes throughout the year every quarter. This enables you to stay up with your income taxes, lower the tax liability at tax time and avoid penalties. It’s recommended that freelancers cover their estimated income taxes throughout the year.
Where Should I Do My Freelance Taxes?
Okay, you've got the basics down. Now, let's look at which software you should use to do your freelance taxes. Below are some of our favorites.
TurboTax is probably the most widely-recognized tax software program out there. It gives you both impressive and easy-to-work-with plans inside an appealing package.
The look and flow of TurboTax are exactly what makes the software shine. The program goes through a helpful set of questions that alter depending on how you respond to them, like in the same way that a tax specialist would conduct an in-person evaluation.
TurboTax Premier provides a particularly in-depth variation of their conventional application for freelancers. It’s your best option if you’re self-employed or a freelancer.
Remember, the IRS sees them the same. TurboTax Premier offers extra methods of figuring out brokerage firm taxes and taxes related to selling and buying stocks, along with taxes and deductions connected with buying and maintaining rental homes.
Also, all paid versions support online chat options. Lastly, freelancers will enjoy how easily TurboTax can draw information and facts from last year's tax return.
The real draw to FreeTaxUSA will be obvious from the brand alone. They offer federal tax filings completely free. And actually, the features you get at no cost aren't too terrible. FreeTaxUSA enables you to incorporate prior tax return data, offers email-based support, plus finds over 350 credits and deductions.
FreeTaxUSA costs nothing. However, you’re looking at a lesser number of features than you’d get with the other options on our list. FreeTaxUSA is effective for freelancers. Additionally, if you freelance in a state without income tax (congrats, by the way), you could file completely free.
Otherwise, you can still file your federal income taxes without cost, and a state return costs $14.99. For an extra $7, you can upgrade to Deluxe and get extra features like priority support and the capability to amend your return.
Cash App Taxes
I think Cash App Taxes is ideal for straightforward returns. For instance, when you have only a few forms to enter. Consequently, it works effectively for freelancers without complicated tax situations.
The site provides a clean interface that shows the most common forms that might pertain to you. Because of this, freelancers won't feel overwhelmed by the less common forms as you might with something such as TurboTax. It simply feels easy.
Also, you won’t end up being charged an unexpected fee after filling out your information. Cash App Taxes is transparent regarding their costs in that they’re free.
But as I discussed earlier, the application is clean. Meaning it offers no special features. Cash App Taxes offers only basic guidance and assistance. Therefore if your tax circumstance is more complex, I would try another choice on this list.
H&R Block delivers a less costly replacement for top-tier solutions like TurboTax without having to sacrifice capability. The H&R Block application is user-friendly, clean, and easy to browse through. That being said, freelancers might struggle with the software’s lack of ability to interpret specific solutions. I found this challenging with a few distinct freelance questions I had.
However, for most freelancers, H&R Block delivers exceptional support in dealing with freelance taxes and navigating the appropriate deductions you'll want. Additionally, they provide audit assistance to help you fully grasp any notice coming from the IRS (i.e., in case you ever get audited).
And lastly, H&R Block prides itself on giving you 100% correctness. So if they mess anything up with your return, they can reimburse any penalties you incur because of it.
TaxAct is another inexpensive (prices range from $0 to $79.95) option with bundles that vary from its free version to specific software for freelancers along with the self-employed and that is where it shines.
Like others on this list, TaxAct offers a money-back guarantee. 100% accuracy is guaranteed with TaxAct, for up to $100,000 in reimbursement for mistakes.
Now, the cheaper price tag means you lose several of the special features that guide software programs like TurboTax or H&R Block Premium. But the system is equipped to handle most kinds of self-employment, particularly freelancing.
Something I don’t particularly care for with TaxAct is its user interface. It’s a little bit more chaotic than software programs like Cash App Taxes or even TurboTax. However, the software still crushes it if you want a more affordable alternative.
And frankly, if you're a freelancer without a lot of additional tax circumstances, TaxAct is a superb choice (especially considering the cost).
What If I Don't Want to Do My Freelance Taxes Myself?
If you don’t want to do your freelancer taxes yourself, you’re not alone, and I feel you. I have W2 income, two business incomes, and my tax situation gets pretty darn complicated. So I honestly can’t blame you if you want help. For that, check out Cofield Advisors.
Owned by Carter Cofield, CPA, PFS, Cofield Advisors typically serves creatives in the entertainment, writing, and social media industry who earn six figures or more. That said, Cofield Advisors is an awesome service, and even if you don’t meet that criteria that’s okay. I recommend scheduling time to chat with someone from Cofield anyway.
Frequently Asked Questions
How much should you budget for taxes as a freelancer?
As a freelancer, it’s recommended that you set aside between 25% and 30% of your income to cover any quarterly tax payments as well as any final tax bill come April, when your tax return is due. The IRS Form 1040-ES will help you estimate your quarterly tax payments, as well.
Do freelancers get tax refunds?
Freelancers can receive a tax refund, particularly if you’ve over-estimated your quarterly tax payments. But it depends on the financial situation of each independent freelancer. That said, even if you received a 1099-MISC and didn’t pay estimated taxes, it’s possible to get a refund.
Do freelancers get audited more?
As a freelancer, you’re at least three times more likely to be audited than a large company. That’s because, statistically speaking, freelancers tend to make more errors with their tax returns.
This should give you a good starting point of everything you need to know about filing taxes as a freelancer, as well as some of the differences you’ll find between freelancing and self-employment. Just remember, get a separate business account, track your spending and income, and make sure you pay your taxes on time.