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Freelance Tax Guide: Calculate, File, and Pay

By Nick Zarzycki — Reviewed by Janet Berry-Johnson, CPA on February 10, 2020

Here we’ll go over everything you need to do your business taxes properly as a self-employed freelancer. We’ll help you figure out your business entity type, which forms you’ll need to fill out, how to actually start paying the IRS, and flag a couple things you should be aware of.

Step 1: Figure out which kind of business entity you are

You can’t figure out how to do your freelance taxes without first figuring out what kind of business entity you’re running.

Sole proprietor

If you’re a freelancer, chances are you’re running a sole proprietorship—nearly three out of four American businesses are. This makes sense, because “sole props” are extremely easy to set up. There’s no paperwork involved: all you do is just start running a business by yourself.

If you’re a sole proprietor, you’ll report your freelance business earnings and expenses through an extra form attached to your personal income tax return called Schedule C. Every client you did more than $600 of work for in the last year is required to send you 1099-MISC forms, which summarize how much they paid you. But even if you don’t receive a 1099, you still need to report the income. Make sure the income you’re reporting on Schedule C is at least equal to what your 1099-MISCs say.

Once you’ve used Schedule C to calculate the net profit or loss for your freelance business, include this number in your personal tax return. (No need to file a separate return.)

If you’re planning on claiming itemized tax deductions, you’ll need to tally those using Schedule A.

Heads up: sole props are subject to self-employment tax (i.e. Social Security and Medicare). See below for more on filing your self-employment taxes.

Partnership

If you have a formal or informal business partner, the IRS might consider you to be a partner in a general partnership, which is an unincorporated business run by two or more people. Like sole props, they’re super easy to form: in most states, all you need to start one is a verbal agreement and a handshake.

Freelancers working as partners in a partnership need to file Form 1065, which also involves filling out Schedule K-1, which shows each partner his or her share of the profit/loss for the tax year. Each partner gets a copy of K-1, which they then use to fill out their personal tax return. Partners also use Schedule E to claim unreimbursed business expenses.

The IRS has instructions to help you fill out a partnership tax return, but they’re also pretty complicated. You’ll want to get help from a tax professional if you’re a freelancer filing as a partner.

Like sole props, partners are subject to self-employment tax. See below for more on that.

A corporation

Some freelancers will incorporate their business—for tax reasons, to please investors, or simply to draw a firmer boundary between their personal and business finances.

A corporation is a legal entity that is separate from its owners, that gives them a superpower called limited liability. If a corporation borrows money and then loses it all, the people it borrowed money from can’t come after its shareholders or their assets because of limited liability.

If you’re incorporated, you’re probably a C corporation, an S corporation, or a limited liability company (LLC).

C corporation

If your freelance business is set up as a C corporation, you’ll need to prepare a separate income tax return with Form 1120, in addition to your personal taxes.

Form 1120 is similar to the Schedule C form that sole proprietors file, but is more complex, requires more detail and is separate and distinct from your personal tax return. The IRS has instructions for filing it, but most small business owners elect to hire a professional to help them fill it out.

S corporation

If you’ve elected S corp status, you’ll file From 1120S. Like partners in a partnership, S corp owners also need to report their share of profit or loss with a Schedule K-1.

Unlike sole proprietorships, partnerships and LLCs, S corp owners only pay self-employment taxes on their own wages, rather than their entire share of the company’s profits.

Limited liability corporation

Things get even more complicated if you’ve elected to be taxed as an LLC.

If you’re a member of a single member LLC—that is, if you’re the only owner and run the business by yourself—then you file your taxes exactly like a sole proprietor (see above).

If you’re a multi-member LLC—that is, you run the business with someone else—you file your taxes like a partnership would (see above). But you can also elect to have your LLC taxed like an S corp or a C corp, in which case you’d file your taxes like those entities.

Step 2: Figure out your tax-deductible expenses

If you earn freelance income and pay out of pocket for all your business expenses, you need to keep records for those expenses and deduct as many of them as possible on your taxes. Particular tax deductions you should look out for include:

Self-employment taxes, and other taxes

You can deduct 50% of self-employment tax that you calculated on Schedule SE, because the IRS considers the employer portion of the self-employment tax to be a deductible expense.

Health insurance

Health insurance premiums for self-employed people are an above-the-line deduction. In addition to insurance premiums, you can deduct other out-of-pocket medical costs, such as office co-pays and the cost of prescriptions. These costs are included as itemized deductions on Schedule A.

Business use of vehicle

If you use your vehicle solely for business purposes, then you can deduct the entire cost of operating the vehicle. (If you use it for both business and personal trips, you can only deduct the costs associated with business-related usage.)

Home office deduction

If you run your sole proprietorship out of a home office, you may be able to deduct a portion of your housing expenses against business income, provided it’s your principal place of business and you use it regularly. You’ll likely need to file Form 8829 along with your Schedule C when taking the home office deduction, which you can learn more about in our guide to the home office deduction.

The Qualified Business Income deduction

The Tax Cuts and Jobs Act of 2017 set up a new tax deduction for pass-through entities (like sole proprietorships) which allows you to deduct up to 20% of net business income earned as an additional personal deduction. For a thorough breakdown of how this deduction works, check out our guide to the QBI deduction.

Step 3: Figure out your self-employment taxes

If you’re a freelancer, chances are you have to pay self-employment taxes to the IRS (the current rate is 12.4% for social security and 2.9% for Medicare taxes). To calculate and pay those taxes, you’ll need to use the following forms:

Schedule C

First, you’ll first have to calculate your total self-employment income (or loss) using Schedule C of Form 1040 (On Schedule C, total self-employment income is recorded on line 31.)

1099-MISC

If you did more than $600 of work for a particular client, they’re required to file Form 1099-MISC and send you a copy of it. 1099-MISC is an “information filing form” used to report non-salary income to the IRS. You don’t need to do anything to your copy of 1099-MISC, but if you don’t receive one, you should follow up with your client.

The deadline for getting a Form 1099-MISC to a subcontractor is January 31st, 2020. And, as of this current tax filing, all Form 1099-MISCs must also be filed with the IRS by January 31st.

Schedule SE

You’ll then report the income you calculated above on Schedule SE, which is one of many schedules of Form 1040, the form you use to file your individual income tax return.

Form 1040-ES

To calculate how much tax you need to pay, use the Estimated Tax Worksheet, which is part of Form 1040-ES. (You can then use the vouchers included with Form 1040-ES to pay your quarterly estimated taxes, or pay online using IRS Direct Pay.)

And remember

You’ll need to pay income tax just like anyone else, in addition to self employment tax. Your taxable income is your total income for the year minus any deductions. From there, you consult the tax table for the year to see what your income tax rate will be.

Remember also that as an independent contractor, you’ll have to set aside all of your federal and state income taxes and self-employment taxes, Social Security, and Medicare contributions yourself. You’ll pay all these federal taxes together, four times a year when you pay estimated quarterly taxes.

For a more detailed walk-through of estimated taxes, check out our article How to Calculate and Pay Estimated Quarterly Taxes.

Step 4: Check out our handy quarterly tax calculator

Calculate your estimated quarterly taxes (for free)

Follow our step-by-step estimated quarterly tax calculator to figure out how much you owe.

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Step 5: Start making your quarterly tax payments

If you owe at least $1,000 in taxes, the IRS usually requires you to make estimated quarterly tax payments in April, June, September, and January.

If you’re not sure how much to set aside for these payments, a good rule of thumb is to set aside 30% of your income. Here are two tips to make sure you’re doing so consistently:

  • If you have a consistent stream of income: set up automatic bank transfers to regularly pull funds from your primary bank account into a secondary savings account.
  • If you have variable income: get in the habit of making these transfers manually whenever you close a large deal or receive payment from a client.

You can calculate your estimated taxes on the IRS’ Estimated Tax Worksheet found in Form 1040-ES for individuals or Form 1120-W for corporations.

You can also use our free estimated tax calculator.

For a more detailed walk-through of estimated taxes, check out our article How to Calculate and Pay Estimated Quarterly Taxes.

Step 6: Set up a payment option with the IRS

Via credit or debit card

The IRS has a number of approved providers who will process your debit or credit card payment online. These providers charge a fee, typically around 2% of your tax payment.

There are a few limitations to filing taxes with credit and debit cards. They’re fine for pass-through businesses like sole proprietors, partnerships, LLCs and S Corps. But you can’t use this method to pay income taxes if you’re a C corp. You also can’t use a credit card to pay employment taxes.

Via EFTPS

The Electronic Funds Tax Payment System (EFTPS) lets you transfer tax payments directly from your bank account to the IRS. In order to use EFTPS, you’ll need to enroll in the program. To do that, you’ll need your:

  • Tax ID number
  • Bank account and routing numbers (as found on a voided check)
  • Your name and address as they’re printed on your IRS statements

Once you’re enrolled, you can pay your taxes immediately, or schedule payments up to one year in advance. This is especially useful for paying quarterly estimated taxes.

EFTPS lets you go back and view receipts for past transactions, and will send you email notifications for every withdrawal from your bank account. So it’s easy to stay on top of what you’ve paid, and what you owe.

Note: this is not a guide to doing your state taxes

Keep in mind that this guide only covers federal taxes for freelancers. Your state and municipality may also expect you to pay certain taxes—for example:

  • Franchise Tax: If you have sales tax nexus in a state, that state may charge you a franchise tax. How franchise tax is calculated and applied differs from state to state.
  • Property Tax: Charged on real estate you or your business owns, property tax varies state-by-state—from 0.28% in Hawaii, to 2.38% in New Jersey.
  • Excise taxes: As indirect taxes on goods sold by a business, excise taxes sometimes take the place of corporate income or sales tax. The Gross Receipts tax is a common example of an excise tax.

You’ll want to look up your state’s tax authority and this list of tax-collecting municipalities to get clear on your local tax laws.


This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. Bench assumes no liability for actions taken in reliance upon the information contained herein.

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