If you’ve recently picked up a side hustle or launched a freelance business, you are probably wondering what to do about your taxes as a freelancer this year. Freelancing is different from your regular job, and reporting your income and paying taxes requires a bit more work.
It’s important to keep track of your income, fill out the right forms, and understand exactly what you need to pay as a freelancer. But don't worry; understanding the process is not too complicated once you grasp it.
Explore freelance income, self-employment tax, tax management, and filing guidance. Simplify your tax return process as a freelancer with valuable insights. Plus, we’ll show you a few deductions you can take so you owe less in taxes at the end of the year.
Erika Taught Me
- Freelance income is any income earned from a client or company that you are not employed by.
- Freelance income is subject to self-employment tax, which requires you to pay Social Security and Medicare taxes.
- Taxes aren’t withheld from your paychecks as a freelancer, so you are responsible for paying the IRS on time.
- If you plan on owing $1,000 or more to the IRS from freelance income, you need to pay estimated taxes each quarter.
- There are dozens of tax deductions for freelancers that can lower your taxable income and taxes owed.
What counts as freelance income?
Performing work as a contractor for a client or earning side hustle income from odd jobs, whether online or in person, constitutes freelance income. Since none of this income comes from an employer, consider yourself a contract worker or freelancer.
When you earn freelance income, you will owe taxes on any amount you earn over $400 (total) throughout the year. Most clients that pay you will submit a 1099-NEC form to you showing the total amount earned for the year.
It’s important to report that income on your annual tax return, too, as 1099-NEC forms are also sent to the Internal Revenue Service (IRS). They already know you made the money, and are expecting you to report it properly and pay taxes on it.
Taxes as a Freelancer: Keep track of your deductions
It’s important to keep track of any business-related expenses you incur as a freelancer. Whether it’s software, equipment, or even internet costs, keep track of any and all expenses related to your freelance work. You will end up reporting these on your tax return to lower your income tax owed.
Related: How do taxes work?
What’s different about taxes when you freelance?
When you are a freelance worker, you earn income from a client or company directly. They don't hire you as an employee; instead, they engage you to fulfill the terms of the contract you sign with them.
Because you are not an employee, clients or companies you work with will not pay your taxes for you. You also don’t receive any benefits, such as a 401(k) account or health insurance, that can lower your taxes.
Here are a few differences to consider when being hired as a freelancer:
Taxes as a Freelancer: Taxes are not withheld
In a normal job, your employer will withhold taxes from your paycheck. When you are a freelancer, there are no taxes withheld and you are 100% responsible for paying your taxes on your own.
Taxes as a Freelancer: You have to pay self-employment tax
Self-employment taxes are the Social Security and Medicare taxes that are normally withheld from your paycheck at a regular job. These income taxes total up to 15.3% of your earned income. Normally, your employer covers half of your Social Security and Medicare taxes, while the remaining half is automatically deducted from your paycheck.
But as a freelancer, you are fully responsible for self-employment tax. This means you need to cover the entire 15.3% Social Security and Medicare taxes. This means you need to set aside the funds from your earnings and plan on paying the IRS the entire amount.
Taxes as a Freelancer: You may have to pay estimated taxes quarterly
Freelancers and business owners expecting to owe at least $1,000 in federal taxes must make quarterly estimated tax payments. You can submit your estimated tax payments using the 1040-ES form, or online through the IRS payment portal.
Here’s the payment schedule for quarterly estimated taxes:
Payment Period | Due Date |
January 1 to March 31 | April 15 |
April 1 to May 31 | June 15 |
June 1 to August 31 | September 15 |
September 1 to December 31 | January 15 of the following year |
If you don’t pay enough on your quarterly estimated taxes, you will end up paying the difference when you file your taxes the following year. And if you overpay, you’ll receive a tax refund.
Just make sure that you don’t underpay on estimated taxes by too much ($1,000 or more), or you may owe underpayment penalties.
How to pay your freelance taxes?
To pay your freelance taxes, you’ll need to fill out a few extra forms when you file your income taxes. Clients should send you a 1099-NEC form when you earn at least $600 from them in a calendar year. Even without receiving a 1099-NEC form, freelancers must still legally report any earned income.
If you receive payments through Paypal, Venmo, or other online payment portals, these platforms might issue you a 1099-K form instead. This will show all of your reportable income just like a 1099-NEC, so report it the same way.
Once you have all of your reportable income and documentation in place, you’ll need to fill out a Schedule C tax form. This form is where you report all self-employment income, including all freelance work and other business income. In addition to income, you can report business expenses on the Schedule C form as well, helping offset the total tax liability on your freelance income.
Most online tax software (such as TurboTax) offers helpful guides for reporting your freelance income and fills out your Schedule C form for you. It is probably best to use tax software to complete your annual tax return.
Related: When are taxes due? A guide to deadlines and extensions
Tax deductions for freelancers
There are several tax deductions available for freelancers that can help lower your taxable income and, ultimately, lower your tax bill. Here are a few popular deductions for freelancers:
- Online services and memberships. If you pay for any online services related to your business (such as accounting software) or pay for memberships to professional organizations, you can deduct those.
- Equipment. If you have to purchase equipment for your freelance business, you can deduct these expenses. Section 179 of the IRS code typically lets you deduct the entire cost of equipment in the year they incur.
- Transportation costs. If you use your car for your freelance business, you can deduct car-related expenses in proportion to the vehicle used for business. Or you can deduct mileage driven for your business at a set rate.
- Office supplies. If you have to purchase office supplies to run your business (such as a computer or printer), you can deduct those expenses from your business income.
- Home office deduction. If you have a dedicated home office for your business, you can deduct a portion of your mortgage and utility costs, measuring the office square footage as a percentage of your home. For example, if your office is 100 sq. ft. and your home is 2,000 sq. ft., you can deduct 5% of your mortgage and utility costs.
- Insurance. If you have business-related insurance and health insurance, you can deduct these from your business income.
There are plenty of deductions for freelancers available. Unfortunately, the complexity of the U.S. tax code makes it advisable to consult with a licensed tax professional if you lack confidence in handling your taxes on your own. Make sure to only work with a CPA, Enrolled Agent (EA), or tax attorney to make sure you are getting the best service available.
Best accounting software for freelancers
To keep track of your income and expenses, it’s a good idea to sign up for accounting software to help you along the way. Here are a few good accounting software options for freelancers:
Quickbooks Online: Quickbooks is the leader in the industry for accounting software. Quickbooks Online offers a “self-employed” version that makes it easy to track your business income and expenses. You can link your business bank account, and Quickbooks will automatically track and categorize your transactions. It also directly integrates with TurboTax, making it easy to file your income taxes.
Freshbooks: Ideal for freelancers—bill clients and track income/expenses in one place. Freshbooks offers less-expensive plans than competitors. It has an intuitive mobile app for keeping track of your business accounting on the go. Plus, there’s direct phone support available on all plans.
Wave: Wave is a free accounting software that offers a lot of bells and whistles without the price tag. You can connect your business accounts. Also, track your income and expenses, generate reports, and even send invoices. Wave proves to be a great solution if you’re just getting started.
FAQs
How much can you make on the side without paying taxes?
Regardless of the amount, you need to report all income and pay income taxes, to the IRS. But, the IRS makes an allowance for side hustle income. Earn under $400 on the side in a year? No need to report to the IRS or pay income tax. But you must report any income beyond that amount and take responsibility for paying self-employment taxes on the surplus.
Related: 15 Side hustles from home you'll actually want to do