If you’ve recently picked up a side hustle or launched a freelance business, you're probably wondering what to do about your taxes 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.
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 owe taxes on any amount you earn over $400 (total) throughout the year. Most clients who 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 IRS. They already know you made the money, and are expecting you to report it properly and pay taxes on it.
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're 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 won't pay your taxes for you. You also don’t receive any benefits, such as a 401(k) or health insurance, that can lower your taxes.
There are a few differences to consider when being hired as a freelancer.
Your taxes aren't 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.
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 15.3% of your earned income.
Normally, your employer covers half of these 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%. It's important to set aside this money so you can pay the IRS the entire amount.
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, 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?
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.
- 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, but the complexity of the U.S. tax code can make them hard to figure out on your own.
You may want to consult with a licensed tax professional. Make sure to only work with a CPA, Enrolled Agent (EA), or tax attorney to make sure you are getting the best service available.
Accounting Software for Freelancers
To keep track of your income and expenses, it’s a good idea to sign up for accounting software. Here are a few good options for freelancers.
Quickbooks Online
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
Freshbooks is ideal for freelancers since you can bill clients and track income/expenses in one place.
It also offers less-expensive plans than its competitors and 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, track your income and expenses, generate reports, and even send invoices.
RELATED: Best Bank Accounts for Freelancers
FAQs
How much can you make on the side without paying taxes?
Regardless of the amount, you need to report all income to the IRS. But the IRS makes an allowance for annual side hustle income under $400. Beyone that amount, you must report it and pay self-employment taxes on the surplus.
TL;DR: Taxes as a Freelancer
Freelancing comes with real tax responsibilities that your 9-to-5 didn't prepare you for — but once you understand the rules, it's manageable. Remember that you're on the hook for self-employment tax and will need to make quarterly estimated payments if you expect to owe $1,000 or more.
The good news is there are plenty of deductions available — from your home office and equipment to health insurance and software subscriptions — that can meaningfully reduce what you owe.
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