Taxes for Freelancers

Last week we talked about how a side hustle toes the line between business and hobby. Now it’s time to talk about the business side, aka freelancing. That word gets thrown around a lot, so let’s set up a working definition, shall we? Freelancing is a form of self-employment that works like a skill for hire. (Nerd Fact: The term comes from medieval mercenaries whose services – with lances or whatever weapon – were not bound to any one master but open to whoever was willing to pay: hence “freelancing.”)

So aside from the perk of feeling like a member of Ivanhoe’s Free Companions (don’t lie, you thought it was cool, too), freelancing is awesome for people with a high-demand skillset who want to work on their own terms. But there’s a slight catch: since you don’t have any one employer, your taxes are a bit more complicated.

Worry not! Let’s see if we can’t make this a bit easier to follow by breaking down taxes for freelancers.

Quarterly taxes and 1099s

So the first thing you need to know is that you’re not going to get a Form W-2 in the mail come January. And no, that doesn’t mean you don’t owe taxes (sad day). As your own employer, you’re going to do your taxes with Forms 1099, quarterly estimated taxes, and filing a return on time. Sound complicated? Hang with me.

If one of your clients believes you’ll earn more than $600 annually for services you perform for them, you’ll need to fill out a Form W-9 for that client. While this is just a fancy name for one sheet of paper with your name, address, Social Security Number and a few other simple items, it’s really important: it must be provided to the client so that they can fill out the Form 1099 and report your earnings.

The next thing on the list is quarterly estimated taxes, and I promise it’s not as freaky as it sounds. Since you don’t have an employer withholding money from every paycheck for Social Security and Medicare taxes, the IRS holds you responsible to do your own withholdings. Every quarter you’ll pay self-employment tax (which is basically Social Security and Medicare) at a rate of 15.6% of your income. The deadlines are April 15, June 15, September 15, and January 15 of the following year.

Now, the great thing about quarterly taxes is that, yes, they’re estimated, which means that when you file your tax return, you might get a refund if you paid too much money per quarter. Paying estimated taxes is just a good way to make sure you’re keeping track of everything you owe the IRS.
And that brings me to the last item of business: You still file a tax return in April. Like I said, your quarterly taxes are basically just you acting like an employer and withholding taxes per paycheck. By the time April 15 rolls around, you’ll still file a tax return, and this is where freelancing really has some great perks.

Deducting expenses as a freelancer

By working for yourself, you have to do all the heavy lifting: buying supplies, running a home office, driving that non-company car you’ve had since high school – you get the idea. The good news? Since you’re using those things for your job, you can get a tax break for them (yay!).

Need internet to communicate with clients? You can deduct your bill. Need a new piece of equipment for your work? It's deductible. Been driving 30 minutes out of town for photoshoots? You can deduct car expenses too. Keeping track of all deductible expenses can be time consuming, but it’s definitely worth the extra effort.

As usual, there is a catch: you have to make sure you keep your personal and business expenses separate; you don’t want to make the mistake of deducting personal expenses. If the IRS looks at your tax return and thinks you’re listing expenses that aren’t legit, you can be audited – which is when the IRS investigates to make sure that everything on your return is true-blue accurate.

File your return; pay quarterly taxes; keep records; repeat

Being self-employed as a freelancer means being your own boss. The bad news is that it means you have to do the boss’s job of keeping track of your taxes, withholdings, and bookkeeping. The good news is that online filing is easier than ever, especially (of course) with 1040.com. For more self-employment and freelancer information, check IRS.gov.