How To Become A Freelancer, Part 2: Freelance Taxes
How To Become A Freelancer, Part 2: Freelance Taxes
Freelancing is a wonderful new tool that thousands of people are taking advantage of in 2019. In fact, freelancers are expected to make up the majority of the U.S. workforce in the next decade. It gives you the freedom to choose your career, work from home, set your hours, and get paid for doing what you love.
However, getting paid means filing taxes. When you’re employed by a company, the IRS (Internal Revenue Service) automatically takes a percentage out of your paycheck for Medicare, Social Security, federal and state taxes.
When you’re a freelancer, the IRS considers you self-employed: the employer and the employee. You get to keep everything you earn, aside from the percentage freelance platforms take out of your paycheck.
Because you get to keep (mostly) everything, you have to take taxes out of your paycheck yourself.
Many resources exist on the Internet for tips on freelance taxes, but most of them are cryptic and confusing. With just a little bit of research, you’ll be ready to file your taxes like a pro (even if it’s your first time).
Before reading any further, make sure you read Part One of this short series; it will give you the context for why your taxes are just as important as your freelance work.
Why You Must Do Your Taxes, Even As a Freelancer
If you have any experience with taxes, you already know that the whole process is overwhelming. Self-employment taxes are no different; they contain multiple components that often seem to blend together.
Don’t let this scare you off! It’s possible to file your taxes without becoming overwhelmed.
I say this because you might be tempted to just blow off your self-employment taxes. You may be thinking, “What’s the big deal? How will the IRS know if I don’t pay taxes out of my freelance paychecks? They can’t be watching that closely.”
Believe me, they are. If you skip out on your taxes, you’ll have to pay a penalty fee.
The Basics of Freelance Taxes
If you make less than $400 as a freelancer, you don’t need to file self-employment taxes. You only need to focus on filing your annual tax return.
If you make $400 or more in a year as a freelancer, you are required to file self-employed taxes in addition to your annual tax return. Self-employed individuals (freelancers, in our case) must file two kinds of forms:
Annual income Tax
Also, you must file your taxes on two different occasions:
Quarterly estimated taxes (only if you expect to owe more than $1,000 in taxes)
Tax Day (April 15th or sooner)
The self-employment tax rate is 15.3 percent.
Because this article will primarily focus on how to do self-employment taxes, this is all you need to know about your annual tax return:
It’s due April 15th
For now, I’ll walk you through how to handle your self-employment taxes.
How To Do Freelance Taxes, Step-by-Step
Instead of you jumping through websites to figure out the best way to tackle freelance taxes, I did that work for you:
Keep a record of all your freelance earnings
Determine your annual earnings and deductions
Plan out your estimated quarterly tax schedule
Pay your self-employment taxes each quarter
Your Record of Earnings
The first thing you’ll want to do is create a spreadsheet (Excel or Google Sheets are great) and start keeping track of everything you earn from your freelance work. If you work for several clients, organize your income by client.
(Note: if you use Upwork, they keep track of all your earnings for you.)
You’ll need to estimate your annual income (this will be extremely helpful when you start filling out forms). Estimate how much you expect to make by April 15th (Tax Day).
For example, let’s say you get paid roughly $300/week. Multiply that by four (four weeks in a month), then multiply that by the amount of months left until April. Presently, it’s six. That means, you’ll make approximately $1,800 for the rest of the year until you have to pay taxes.
Now, add $1,800 to the amount you’ve already made since this past April. That number is your estimated annual income. Keep this number handy.
On your spreadsheet, you’ll want three columns:
Amount from each individual paycheck
The amount you’ll need to set aside from each paycheck in order to have enough for filing taxes (The IRS recommends 25 to 30 percent).
Notes? (Any additional comments or information you may need in the future)
It should look something like this; super straight-forward and simple.
If you use a freelance platform like Upwork or Fiverr, your clients will most likely pay you through the website. If you’ve earned over $20,000 or have been paid more than 200 times, your clients are required to provide you with a 1099-K form, but most don’t.
Although providing this form for you is required, clients don’t receive any penalty if they choose not to. So, many simply skip this step.
In the same way, if you’re doing freelance work outside of a platform, your clients are required to provide you with the 1099-MISC form, but most don’t.
Regardless of how you freelance, keep track of your earnings yourself. That way, you’re not waiting for your clients to get back to you with a form. It also gives you a sense of organization and control over the craziness that is freelancing.
Determine Your Earnings
In order to determine your earnings and estimate the taxes you’ll owe, you’ll need the 1040 ES Worksheet. Along with this, open your new spreadsheet with the history of your earnings. The first few pages of the document are instructions: Use them to fill out the worksheet and estimate your earnings for the coming year.
Because these amounts will be estimates, if you end up overpaying on your taxes, you’ll get that excess amount back after your tax return is processed. If you don’t pay enough, you’ll be notified and given an opportunity to pay the difference.
Deductions could cut your tax bill significantly. You need to make sure you record everything you spent in order to run your freelance business. You’ll use the Schedule C form for this.
For your expenses, you should keep receipts or payment confirmation emails for proof. Some common things freelancers claim deductions for include:
Office supplies (printer paper, photo paper, ink)
Computer services (repairs, software)
Transportation costs (gas, flights, meals)
Advertising/marketing for your business
Your expenses must be business-related, or else they will be counted as irrelevant.
Plan Out Your Estimated Quarterly Taxes
If you expect to owe more than $1,000, the IRS requires that you take advantage of the quarterly estimated tax option. If you don’t, you’ll have to pay a penalty fee.
The quarterly tax periods are divided as follows:
Quarter 1: January 1st – March 31st (Deadline: April 15th)
Quarter 2: April 1st – May 31st (Deadline: June 17th)
Quarter 3: June 1st – August 31st (Deadline: September 16th)
Quarter 4: September 1st – December 31st (Deadline: January 15th)
After you’ve properly filled out the 1040 ES form, you’ll have a schedule at the end that tells you exactly what you need to pay and when. It looks like this:
If you have already missed a quarter, don’t worry about it. Just add the amount you owe to your next quarterly payment. Or, if you’re close to April, just pay your self-employment taxes then.
File Your Taxes
To submit your tax payment to the IRS, I recommend the Electronic Federal Tax Payment System. It’s the most secure payment method for larger tax payments.
You can also pay by credit or debit card on the IRS website along with a small convenience fee.
The IRS has an entire section on their website dedicated to freelancers, or in their terms, “self-employed” and “independent contractors.” If you have doubts at any point in your tax process, reference this IRS page.
If you get overwhelmed, contact a tax professional. It’s worth the investment to leave your taxes in the hands of a seasoned tax expert.
If you don’t want to do all the math on your own, I recommend using Quickbooks. This software is an excellent tool that many freelancers swear by. Quickbooks makes it easier for you to track your self-employment income and expenses so you can accurately pay your taxes every quarter.
The basic plan for Quickbooks is $15 a month, but in the end, it’s worth the investment to keep your finances organized.
Self-employment taxes don’t have to be overwhelming. With just a little bit of planning and organizing, you can file your taxes like a pro. Happy filing!