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A Practical Guide on How to Do Taxes As a Freelancer

A Practical Guide on How to Do Taxes As a Freelancer
Ines Zemelman, EA
10 June 2022

The life of a freelancer is something to aspire to. You don't have to report to a boss or get dressed every morning and go through the trouble of a busy and noisy commute. You can also nap in the afternoon if you want to. 

Over the next decade, the number of Americans working as freelancers is expected to skyrocket. Even if you are already working a full-time job, freelancing is a terrific way to increase your income. However, when it comes to taxes for freelancers, this can be a stressful experience.

Without further ado, let's find out how to do taxes as a freelancer. Whether you're working as a full-time freelancer or just starting a new side business, you'll need to file taxes differently. Whether you are a content creator or a makeup artist, learning how to file taxes is crucial to your freelancing career. And if you're not careful, you could end up paying a substantial amount of your freelance earnings in taxes.

What Is Self-Employment Tax?

If you are a freelancer, you have probably asked yourself the question, “Do I need to pay taxes as a freelancer?” The answer is yes, you do. Being a freelancer puts you in the category of self-employed individuals and liable to self-employment taxes. Taxes paid by small business owners and self-employed persons to the federal government to fund Social Security and Medicare are known as the "self-employment tax." 

A self-employment tax is comparable to the FICA taxes that an employer pays. It is due when a person makes $400 or more in net income from self-employment during the tax year. The tax is calculated and reported on IRS Form 1040 Schedule SE. Self-employed individuals who earn less than the applicable levels are not required to pay tax.

How Does the Self-Employment Tax Work?

The self-employment tax is supposed to be collected from self-employed workers who do not otherwise pay withholding taxes. This includes freelancers, sole proprietors, and independent contractors who operate in a trade or business. The Internal Revenue Service (IRS) may regard a member of a partnership that operates a trade or business to be self-employed. Self-employed people include freelancers who are subject to taxes for freelancers and must pay self-employment tax in order to get Social Security benefits after they retire.

In every business, both the employee and the employer are taxed to fund Medicare and Social Security, the two largest social welfare programs. Self-employed individuals are considered both the employer and the employee in the eyes of the IRS and must therefore pay both amounts of this tax. Here is how it operates. 

Deductions On Taxes For Freelancers

So, now that you understand that being a freelancer, you are classified as self-employed and liable to paying self-employment tax. There is some good news, and that is deductions on expenses. The IRS allows you to write off many of your business expenses, which can significantly lower your burden of annual taxes. 

Tax Forms to Use

You may already know about the W-2 tax form, which you receive from a traditional employer, and Form 1040, which is the standard U.S. Personal Income Tax Return. Besides these two forms, there are some other forms that freelancers need to fill out to do their taxes right.

Form 1099-MISC

This is the tax form used when filing taxes for freelancers. It is also known as the Miscellaneous Income tax form. If you earned all of your money doing freelance work, it would turn up on this form. Otherwise, your earnings may be split between a W-2 form and 1099-MISC. 

The companies you completed contract work for may also issue you a 1099-MISC. If you have completed contract work for many companies, you must obtain this form from each one.

Form 1099-K

Payment settlement entities, or "PSEs," should provide you a 1099-K form if you received payments from them totaling more than $600. Third-party settlement companies such as Zelle, Venmo, Cash App, PayPal, and Stripe are examples of PSEs.

Form 1099-K is a reportable payment transaction statement. In some situations, a business or individual by whom you performed contract work may not provide you a 1099-MISC form but instead, pay you through a PSE. If that's the case, you will require this paperwork to record your earnings.

Form 1040-ES

1040-ES is the form for quarterly projected tax payments, which is an option for freelancers who choose to pay their taxes in four installments throughout the year. If you do not choose to complete the form, you also have the option to pay quarterly estimated taxes on the IRS website.

Form W-9

You should have been issued a Form W-9 to fill out if you did any freelancing work for a company. Third parties utilize this official form to collect your name, address, and taxpayer information. If a company requests that you complete a W-9 form, it signifies that they will disclose to the IRS that you were paid for contract work.

Tax Deadlines

Learning how to do taxes as a freelancer requires being aware of tax deadlines. Being self-employed entails certain tax responsibilities, such as budgeting for the taxes you'll have to pay to the Internal Revenue Service (IRS). Since your company does not withhold taxes from your paycheck, you must determine your tax liability throughout the year and set down enough money to cover your obligations. 

It might be difficult to determine how much tax you will owe and when you should pay, especially if you're new to freelancing or unsure of how much you'll earn this year. Learning about the taxes you owe as a freelancer, your tax deadlines, and how to file taxes as a freelancer is as crucial to your freelancing career as is making some extra money.

When To Pay Your Estimated Taxes?

When you have taxes deducted from your paychecks throughout the year, the IRS receives periodic payments. Your employer is responsible for submitting the funds by the due date. Taxes for freelancers work the same way, but in this case, you are obliged to pay anticipated taxes in the same manner on your own. Every three months, you must give the IRS these quarterly payments.

If you are self-employed and expect owing $1,000 or more in taxes at tax time, you must pay expected taxes throughout the year. These payments should represent the income tax you owe for the most recent quarter.

Tax payments are usually due on the following dates:

  • The current year's April 15th
  • The current year's June 15th
  • The current year's September 15th
  • The following year, on January 15th,

Penalties For Late Tax Payments 

Besides being aware of the tax deadlines, learning how to do taxes as a freelancer also requires knowing what happens when you do not file taxes on time. Based on your income and the amount of tax you owed in the prior year, the IRS may apply additional tax charges if you fail to pay your quarterly taxes or estimated taxes on time. However, you may not be required to pay tax penalties if you have underpaid your estimated tax payment, provided that:

  • Your expected tax payments equal 100% of your tax liability from the prior year.
  • At the very least, you've paid 90% of your current year's tax due.
  • After subtracting your credits and withholdings, you owe less than $1,000 in taxes.

Remember that paying expected quarterly taxes does not exempt you from filing your taxes by the next year's Tax Day. Your state, federal and local tax returns must still be filed. After calculating the amount of estimated taxes you've paid, you'll be able to know if you still owe extra taxes or are eligible for a tax refund.

Conclusion 

There has never been a better time to be a freelancer. Today's content creators have more opportunities than ever before. If you are good at writing, photography, videography design, or social media, you can generate your own content or content for others. Doing so, however, renders you a self-employed individual, making you liable to self-employment taxes, and makes learning how to do taxes as a freelancer far more important than you might have imagined. 

This comes with a certain amount of responsibility in calculating and filing your taxes on time. And, if you wish to deduct any business expenses you incur while creating content from your taxable earnings and save more of your revenues, you should keep track of them and hire a professional to make sure you file your taxes flawlessly.

Ines Zemelman, EA
Founder of TFX