It takes guts to go solo. Choosing to pursue your profession minus the oversight of a boss means shouldering a lot of responsibilities. And one of those responsibilities is filing freelance taxes with the IRS.
Don’t let the stress of tax season have you questioning your choice to go solo. Whether you’ve been at this for years or just starting out, this guide gives you the tools you need to confidently file your freelancer taxes correctly and on time.
First, make sure you understand your business structure
Typically, an independent contractor (or freelancer) will operate either as a sole proprietorship, limited liability company (LLC), partnership, or S corporation. With any of these business structures, your earnings are reported as part of your personal income.
In the USA, 70% of businesses are registered as sole proprietorships—clearly the most popular business structure for entrepreneurs going it on their own. Setting one up is quick and easy: if you don’t formally register as a certain type of business entity, the IRS will treat you as a sole proprietorship by default.
If you are a part-time freelancer, and also someone’s employee, you’ll need to file your own freelance taxes, with Form 1040 (US Individual Income Tax Return), while your employer files a Form W-2 (Wage and Tax Statement) for you.
The taxes you need to pay
If you do more than $600 of work for a client, it’s their responsibility to file a Form 1099-MISC and send you a copy. A Form 1099-MISC (Miscellaneous Income) is what contractors receive instead of a Form W-2 (which is for employees).
Your client should send you a Form 1099-MISC by January 31st at the latest. It’s in their best interest: if they don’t, the IRS will charge them a penalty.
Calculating your income
When you take every Form 1099-MISC you receive for the year, and add them up, you get part of your taxable income. This is important: you must report all income, even if it doesn’t appear on a Form 1099-MISC.
So, if you earn less than $600 working with a client, and as a result they don’t file a Form 1099-MISC, you still need to include that amount when calculating your income.
Similarly, if a client fails to file a Form 1099-MISC, or send you a copy, you still need to report the income.
The IRS really doesn’t like it when you under-report your income. If you under-report, you’re liable to be charged penalties.
Calculating and paying your income tax
Since you’re likely filing quarterly estimated taxes, you’ll be estimating your income and paying a percentage of that four times over the course of the year.
To calculate how much tax you need to pay, use the Estimated Tax Worksheet, which is part of Form 1040-ES.
Rule of thumb: set aside about 30% of your freelance income over the course of the year in order to cover income taxes.
You’ll also use Form 1040-ES to file your quarterly estimated taxes.
For a more detailed walk-through of estimated taxes, check out our article How to Calculate and Pay Estimated Quarterly Taxes.
When you work for someone, part of your income is withheld to cover Federal Insurance Contributions Act (FICA) tax.
FICA consists of your contributions to Social Security and Medicare. Your contribution is matched by your employer (if you have one).
When you pay self-employment tax on your freelance income, you’re paying both the portion of FICA you would normally pay as an employee, and the portion your employer would match.
Note: Even if you are freelancing part-time, and your employer is withholding FICA from your income, you’ll still need to pay self-employment tax on all the income you earn as a freelancer.
Your self-employment tax is filed with Schedule SE, Form 1040.
Calculating and filing self-employment tax
Put simply, the self-employment tax rate is 15.3% of your income. It can be calculated on Schedule SE, Form 1040 when you file.
The breakdown: Social Security is covered by 12.4% of your income, up to an income of $127,200. Medicare is paid for with 2.9%.
Federal taxes vs. state and municipal taxes
For the most part, this guide covers federal taxes.
But your state and municipality may also expect you to pay taxes. Since every state and municipality is different in this regard, it’s beyond the scope of this guide to cover them all.
To find out what you need to pay in addition to federal taxes, visit the tax authorities for your state and municipality. Here’s a directory to every US state’s tax authority, and here’s a list of every tax-collecting municipality in the USA.
If you work with subcontractors, read this
When you’re a freelancer, you depend on your clients to file Form 1099-MISC for you. When you hire subcontractors to take care of freelance work, the script is flipped. It’s up to you to fill out and file Form 1099-MISC for every subcontractor you pay more than $600 during the course of the year.
The deadline for getting a Form 1099-MISC to a subcontractor is January 31st, 2018. And, as of this current tax filing, all Form 1099-MISCs must also be filed with the IRS by January 31st.
When you work with a subcontractor, it’s best to have a subcontractor’s agreement in place. In addition to other info, this agreement between you and the subcontractor lists the services they’ll be providing—as well as whether they will be using your facilities and equipment, or their own.
It’s important a subcontractor doesn’t do any work besides that described in the agreement. In case of an audit, the IRS will try to determine who works for you is a contractor, and who works for you as an employee.
If they decide that one of your subcontractors is fulfilling the duties of an employee, you could be penalized for not filing the correct taxes (ie. your share of FICA).
If you’re hiring contractors for the first time, and you’re not sure how you should classify them, ask an accountant.
How to take advantage of tax deductions
Sadly, it’s illegal to skip paying taxes outright. However, there are ways you can minimize how much of your money goes to the IRS.
That’s where deductions come in handy. When you spend money on certain business expenses, the IRS will cut you a break on how much you have to pay in taxes.
Your tax deductions are reported on Schedule C of Form 1040, which you use to report your personal income. Form 1040 is filed at the end of the year, with your final quarterly estimated tax payment.
Here’s what you can deduct
From home office repairs to health insurance, there’s a wide range of deductions available to freelancers. To learn about which deductions you may qualify for, and how to report each one, read our article Small Business Tax Deductions and How to Claim Them.
How to file your freelancer taxes
Doing it yourself
If you don’t owe any outstanding taxes from the past, and your freelancing business hasn’t changed significantly in the past year or two, you can opt to roll up your sleeves and file taxes yourself.
There are two methods for filing your taxes: by mail, or online.
To file by mail, you’ll have to obtain tax forms by ordering them online, then fill them out and submit them to the IRS. You can pay your taxes by check or money order.
To file online, you create an account on the IRS website, and transfer funds directly from your credit card or debit accounts.
We recommend online filing because of its ease and speed. It also saves trees and reduces the likelihood of paper cuts. When you file online, your payment history and other important info is stored in your secure IRS account, so you don’t need to worry about paper records being lost or damaged.
Hiring an accountant
If you have any questions about filing your taxes, or if your freelancing business has undergone recent growth, it’s a good idea to consult with a Certified Public Accountant (CPA). When you’re a potential new client, many CPAs are willing to sit down with you for a free consultation.
Even if you don’t hire an accountant to do your taxes, they can help advise you—for instance, on the best way to estimate your quarterly taxes. Learn more about how to find, hire, and work with an accountant.
Preparing your books for tax filing
Even if you’re only freelancing part-time, you should still have a bookkeeping solution in place. It will make tax season a lot easier.
After you “close” your books after the end of the year—bring all accounts up to date, and finish record-keeping for the financial year—you can quickly determine your income.
You need to know your income in order to file your taxes. If you haven’t closed your books, you may find yourself scrambling to get all your information together so you can file a Form 1040 before the tax deadlines.
If your books are well-organized, and you have separate ledgers tracking different categories of business expenses, you’ll also find it easier to track your deductions for the year.
Naturally, we recommend trying Bench out. We pair you with a team of in-house bookkeepers who do your books, and smart software to track your finances. The best part? We specialize in getting freelancers’ books ready for tax filing.
But variety is the spice of life, and every freelancer has their own needs. If Bench isn’t the right fit for your needs, here’s a guide to picking the best bookkeeping solution for your business.
Quarterly taxes for freelancers
Earn more than $1,000? You need to pay taxes quarterly, in April, June, September, and January.
This applies both to full-time and part-time freelancers. If you work for someone as an employee, they’ll withhold taxes from your pay. But the money you make on the side as a freelancer is also taxed. And those taxes, in the form of a portion of your income, need to be withheld.
You can calculate your estimated tax payments based on last year’s income, or on your estimated income for the present year.
Freelancer tax deadlines
Keep in mind that deadlines for state and municipal taxes will be different from those set by the IRS.
Quarterly estimated tax deadlines for the 2017 tax filing year
Once you start filing estimated taxes for the 2017 tax filing year, here are the deadlines you’ll have to meet through 2018/19:
- April 16, 2018
- June 15, 2018
- September 17, 2018
- January 16, 2019
Personal income tax (Form 1040)
Your income tax for 2017 (Form 1040) must be filed on April 17, 2018.
This income tax filing will also include whatever deductions you’re claiming.
If you’re not ready to file your taxes, you can request an extension with Form 4868 (Automatic Extension of Time to File US Individual Income Tax Return.) If you request an extension, your final deadline becomes October 15, 2018. You’ll still need to make a payment on time, though. Learn more about how to get a tax extension, and what happens when you do.
Partnerships (Form 1065)
If you operate a partnership, you’ll file your taxes as an individual. However, the partnership still needs to report its financial activity for the year to the IRS. This is done with Form 1065 (US Return of Partnership Income), which is due March 15th, 2018.
If you’re a shareholder in an S Corporation, you need to file a Form 1120S (US Income Tax Return for an S corporation), which reports the financial activities of the organization, as well as how many shares you control. Every shareholder in the S Corporation must file Form 1120S.
Subcontractors (Form 1099-MISC)
If you hired a subcontractor in 2017, you must mail them their Form 1099-MISC by January 31st, 2018. You also need to submit a copy of Form 1099-MISC to the IRS by January 31st.
Tax time can sting a little. Math isn’t everybody’s cup of tea, and nobody likes thinking about how much money they owe the IRS.
There’s a silver lining, though. By learning a few simple strategies, you can help make your tax return work for you, not against you—and save money for your freelance business. Read our Guide to Maximizing Your Small Business Tax Return to learn how.