The freelance life is unique in a lot of ways — from the ability to make your own schedule and work in your PJs to the necessary hustle that comes from not having a guaranteed paycheck. And then there are taxes. While everyone’s tax situation is unique based on factors like investments, marriage and homeownership, in general, paying taxes is relatively straightforward for people who work full-time, salaried jobs. But for freelancers, with their cobbled together income, self-employed statuses and individual retirement plans, things are a bit more complex. If you fall in the latter camp, here are six key things you should know about paying taxes.
The forms are different
Don’t expect to get the usual W-2 that full-time employees receive. “A W-2 reports wages paid by an employer,” said Nathan Rigney, principal tax research analyst at The Tax Institute at H&R Block. “Instead, freelancers who perform services for businesses should receive a Form 1099 reflecting the income earned working as an independent contractor.” That said, you won’t necessarily get a 1099 from every company you freelance for — businesses are only required to send them if they paid you at least $600 during the tax year.
You have to report income even if you don’t receive a record of it
Whether or not you receive a 1099 from company has no bearing on whether or not you have to report the money they paid you. “It’s a common misconception that if a taxpayer does not receive a Form 1099, that income isn’t taxable,” Rigney said. “This isn’t true. All income earned through a business, as an independent contractor or from informal side jobs, is self-employment income, which is fully taxable and must be reported.”
So, as a freelancer, it’s up to you to keep track of your income throughout the year in order to properly report it at tax time.
You probably need to pay taxes quarterly
Generally, full-time employees have taxes taken out of each of their paychecks — meaning they’re paying taxes throughout the year — while freelancers do not. Because of that, you’ll likely need to pay estimated taxes every quarter. “Generally, if you expect to owe $1,000 or more in taxes [for the year], then you should pay quarterly estimated taxes,” said Lisa Greene-Lewis, a CPA and tax expert for TurboTax. (If you file as a corporation, such as an S-Corp or LLC, you should pay estimated taxes if you expect to owe $500 or more.) Otherwise, you may be subjected to penalties at tax time.
To determine how much you’ll likely owe, you can fill out the IRS’s Estimated Tax Worksheet. You’ll need to enter how much you expect to make for the year — you can use last year’s income as a jumping off point; or if this is your first year freelancing, do your best to estimate how much you’ll make. If you estimate too high or too low, you can complete another worksheet the following quarter to adjust, per the IRS.
As a freelancer, you’ll be paying the federal income tax as well as a 15.3 percent self-employment tax (if your net income from freelancing is $400 or more for the year). “This tax covers your required contributions to Social Security and Medicare, and functions similarly to Federal Insurance Contributions Act (FICA) taxes that are withheld from your wages and paid by your employer if you are an employee, rather than self-employed,” Rigney said.
You can pay your taxes via mail or online, and they’re due in April, June, September, and January — 15 days after the end of each quarter. (Per the IRS, if the 15th is a Saturday, Sunday or legal holiday, you have until the first day that’s not one of those to make your payment.) You’ll also need to file a Schedule SE and, if you’re a corporation, a Schedule C during tax season to calculate your actual (versus estimated) self-employment tax and business earnings. Whether or not you have to pay anything (or receive a refund) will depend on how those numbers compare to what you’ve been paying throughout the year. “Freelancers who make estimated tax payments during the year may get tax refunds if their estimated tax payments exceeded their tax liability,” Rigney said. “Freelancers who don’t make estimated payments during the year will generally end up owing a balance due when they file their tax return.”
You can deduct many expenses related to your work
“Freelance writers can deduct any business expense directly related to their business,” Greene-Lewis said, explaining that those deductions reduce your taxable income. “[You] can deduct business meals, travel, car expenses, marketing expenses and so much more. You can [also] write off industry specific deductions, like the cost of your website, networking expenses and workshops attended.” If you work from home, you can also claim a deduction for your home office; and, Rigney noted, you may also be able to deduct a portion of your mortgage interest and real estate tax if you own your home.
“Freelancers are afraid to take deductions like the home office deduction, however less than 1 percent of taxpayers are audited,” Greene-Lewis said. “If you use your home office specifically for your business you should take the tax deduction.”
While you aren’t required to file receipts for these deductions, Greene-Lewis recommended holding onto them so you can accurately calculate your expenses when you file. “If you take a client to lunch, make sure you write down the date and business purpose of the meeting,” she said. “Also, keep a log of your mileage that includes date of travel, mileage, and business purpose,” as you can deduct mileage.
You also might be able to take advantage of the brand-new qualified business income deduction, which will allow certain small business owners (such as freelancers operating as S-corporations) to deduct 20 percent of their freelance income. As CNBC reported, though, the guidelines are a bit unclear, so it may be best to ask a tax professional whether or not you qualify.
You can set aside pre-tax money for your retirement
Just as full-time employees can enroll in plans that set aside pre-tax dollars for retirement, so can freelancers. “When you’re self-employed, you can make a 2018 contribution to your SEP IRA,” Greene-Lewis said. For 2018, you can contribute either 25 percent of your income or $55,000 (whichever is less). For 2019, the latter number is $56,000. You can contribute that anytime “up until the tax deadline, which is April 15...and lower how much [you owe in] taxes 2018,” Greene-Lewis said.
You can also go with the Solo 401(k) option if you are the only person in your corporation. With this retirement plan, you can contribute pre-tax dollars as both the employer and employee of your business. The details about how much you can set aside are available on the IRS website.
It’s probably worth it it to get professional help
As a freelancer, the various tax rules and requirements can get really confusing really quickly — so it might be worth it to pay for some professional help. “Not only can a qualified tax professional who specializes in small business help freelancers identify ways to lower their taxable income and claim all the tax benefits they’re eligible for, but the cost of tax preparation may even be a deductible expense,” Rigney said. Consider an option like H&R Block’s virtual Tax Pro Go or TurboTax’s Live Self-Employed. If you want to meet with a professional in person, research tax professionals who specialize in freelance or small business in your area; or better yet, ask your fellow freelancers for recommendations.