Being your own boss and working for yourself is pretty cool. You get to provide work and value on your terms, instead of being told where to go, when to show up, and how to do your work.
It’s all fun and games until the end of the tax year arrives and you’re wondering how to file taxes as a freelance worker.
It takes a little more effort on your part because you have to do all the paperwork yourself. To make it easier, you should keep all records of operations organized for when you have to file your taxes.
This guide will break down and simplify freelance taxes and show you how to file taxes as a freelance worker. Whether you’re just starting to dip your toes in the freelance world or you’ve been freelancing for a while, this will help you to navigate the world of freelance taxes.
What’s Different About Filing Self-Employed Taxes?
When you work for yourself, you are both your own employee and employer.
Why does this matter? Because you are now responsible for paying the full amount of Social Security and Medicare taxes, on top of the income tax that everyone has to pay.
Regular W-2 workers still pay Social Security and Medicare taxes, but they split the bill with their employer.
As a freelance worker, your tax liability increases because you have to cover the employer part too. This is known as the “self-employment tax,” which is 15.3% of your net earnings.
You might be second-guessing your decision to work for yourself because of your new tax liability. Having an employer foot half of the bill might save you more money, but don’t worry, you get something in return.
Freelancers and self-employed people enjoy many tax write-offs, including deductions for home offices, and internet and phone bills, that regular W-2 employees do not have. This makes up for your high tax liability.
Important Tax Forms for Freelance Workers
Here are some important tax forms that you will be filling out when you file your taxes as a freelance worker. Depending on how much you make from your clients, you may or may not need all these forms.
Form 1040
This is the form you will use to file your federal income tax return. You fill this form out once a year.
Schedule C
Use Schedule C (Form 1040), Profit or Loss from Business, to report all income and expenses from your business. This is also where you will list all the tax deductions you would like to apply.
Schedule F
Use Schedule F (Form 1040), Profit or Loss from Farming, if your business is farm-related. You must declare all income and expenses from your farming activity on this form.
Schedule SE
If your total net earnings from self-employment exceed $400, use this form. Schedule SE (Form 1040), Self-Employment Tax, helps you to determine how much taxes you owe based on your total profits.
1099 Forms
If you provided over $600 worth of services as a freelancer, independent contractor, or non-employee to an established business, you should receive a 1099-NEC form.
If you subcontracted work from an independent contractor and paid over $600 for services, you must send out 1099 forms.
Be sure to verify their taxpayer identification number (TIN) to avoid ridiculous IRS penalty fees for inaccurate reporting. It’s silly, but it happens all the time. Find more information on TIN verification to avoid those crazy fees.
How to File Taxes as a Freelance Worker
Here’s a simple equation to help you understand what taxes you are responsible for as a self-employed person:
Income tax + Self-Employment tax = your freelance tax liability
Everyone pays income tax (at least on the federal level) and self-employed people pay, you guessed it, the self-employment tax.
Self-Employment Tax
As mentioned earlier, the self-employment tax is 15.3% of your net earnings. This is the breakdown of the self-employment tax:
15.3% = 12.4% (for Social Security) + 2.9% (for Medicare)
There are a few things to note for the self-employment tax:
- Only the first $142,800 of net earnings is subject to Social Security tax for the year 2021
- You pay an extra 0.9% Medicare tax if your income exceeds over $200k
- Estimated taxes are due quarterly if you expect to owe over $1,000 in taxes to the IRS
Freelancers pay their estimated taxes throughout the year in four quarters. Here are the self-employed tax due dates for the year 2021:
- April 15th
- June 15th
- September 15th
- January 17th in 2022
Income Tax
Income tax is the tax you pay on money you earn throughout the year.
Most people pay both federal and state income taxes when they file their annual tax returns. However, if you live in a state without income tax, you only pay income tax on the federal level.
To file your annual taxes, you must get all of your paperwork in order.
Gather all proof of income including invoices, 1099 forms, and transaction histories from third-party providers such as PayPal. Then, collect all of your expense statements including credit card statements and receipts.
At this point, you may choose to hand them off to your trusted accountant and let them do what they’re good at. If you’re brave enough to attempt filing taxes on your own, fill out the following forms as applicable to your situation:
- Form 1040
- Schedule C
- Schedule F
- Schedule SE
You will need information provided from Schedule C and Schedule SE to fill out certain lines in Form 1040.
When you are done filling out these forms, you may either file electronically or in paper form.
No Match for the Prepared Freelancer
Figuring out how taxes work for newly self-employed people can be overwhelming. You wanted to start your own business and work for yourself, not throw yourself into confusing tax work.
Hopefully, this guide has simplified freelance taxes for you and given you a better idea of how to file taxes as a freelance worker. If you stay organized with all of your paperwork and bookkeeping from the start, you will enjoy a much easier time filing taxes when it’s time.
For more tips to help you along your freelance journey, check out our other articles now.