Taxes for freelancers
Of all the unpaid labor you must do as a self-employed worker, few are more confounding than taxes for freelancers.
When I started freelancing, I did so on the wing of a prayer, which is more than a little shameful for the daughter of someone who worked his whole life in banking compliance.
And believe me, the IRS took note.
After getting that proverbial slap in the face, I decided I needed to get on the right side of the tax man. I discovered it wasn’t hard to keep things in line.
When you work as a salaried employee, all it takes is filling out that blissfully easy W-4 and returning it to the company. If you make more than $400 from a side gig or a contract, however, you’ll need to set some of this money aside for taxes.
The IRS has a self-employed tax center that lays out everything you need, but taxes for freelancers can still feel confusing.
So, in this post, we’ll break things down and help you get your taxes squared away. This means you’ll be sitting pretty come April 15th.
Getting paid
Let’s start with the important part: getting that sweet, sweet money.
Once you’ve agreed on how much your client will pay you, you must confirm how that’ll be taxed. As a contractor, you will almost always be classified as a 1099 employee, meaning you’re responsible for paying the taxes on the money you make. The company you work with will not be doing that.
Every contract you work with should provide you with a 1099-NEC form upon completion of the agreed-upon work. This form states what the company paid you and is sent to the IRS. Fight the temptation to file it away for another day because if there’s one thing the IRS looks for, it’s money you owe them. Stick it with your “tax for freelancers” documents and make sure it gets filed at tax time.
Paying the man
We need to address two parts here. The first is how you file your self-employment tax, and the other is how and when to pay the taxes you owe.
For starters, let’s look at the Schedule SE form. This form is basically what you must pay for Medicare and Social Security. Since an employer usually pays for these things, it’s an added responsibility on your part as a contractor. For the most part, when you hear someone refer to “self-employment tax”, this is what they mean – not actual individual income taxes.
When it comes to paying taxes for freelancers, there are two ways to do it: quarterly and lump.
If you expect to be making more than $1,000 a quarter, you should make quarterly payments. Paying this way not only saves you from having a big “WTF, I owe HOW much?!” moment come April but also avoids the penalty fees that come with it. You’ll need Form 1040-ES [link to https://www.irs.gov/pub/irs-pdf/f1040es.pdf] if you do pay your taxes quarterly.
If, however, you like to stack that fat cash in your account and pay it all at once, based on what you could deduct, you should wait and make one large payment when you submit your taxes.
Deductions and filing at tax time
Speaking of profits and losses, the Schedule C form will be your new BFF. On this form, you submit your business costs: advertising, software purchases, your home office, mileage to meet clients, etc.
And if you’re wondering what to keep track of from Day 1, the Schedule C form has a comprehensive list.
When people say, “Oh, I can just write that off,” this is where they do that, so save every relevant receipt, write down every mile driven for work, and keep as much of your tax money as possible.
You will need both the Schedule C and the Schedule SE to use with your 1040 Form, which is probably the one tax for freelancers form most people are familiar with. Filling out those first two forms correctly will make this one a breeze.
Make sure you submit ALL of them together.
Retirement plans and pay-ins
As a bonus, let’s also talk about retirement plans. There’s a misconception that not having an employer means not having a 401K, and there are some obvious tax benefits to paying into those.
The two most popular options will be a Solo 401(k) and a SEP IRA.
The important distinction for the Solo 401(k) is that you must be a sole proprietor. This option is off the table if you have any employees working for you. Luckily for most freelancers, this isn’t an issue. What you DO need to do this is an Employer Identification Number (EIN), which you can get by forming an LLC.
As far as the Simplified Employee Pension (SEP) IRA is concerned, you can have a few employees working under you and still qualify for this plan, but it’s just as easy to contribute as someone self-employed. The tax deductions work the same way they do for a traditional IRA, and you’re not tied to paying into it every month the way you are with a 401(k).
Wrapping up taxes for freelancers
I hope I’ve made taxes for freelancers a little less daunting.
The obvious disclaimer here is that I am a writer, recovering developer, and Googling enthusiast – NOT an accountant. While these steps should make filing your taxes easier, if you have any questions or doubts about doing it right, you should contact a CPA.
Once I contacted a CPA, I was able to see what was needed for the following year. This means I paid someone once, saw what I did right and wrong, and was able to correctly do taxes for freelancing in the future all on my own.
You’ll also have a different experience if you’re living internationally, and you should definitely seek a trained professional’s advice.
Regardless of the route you take, with a couple years of experience, this will all turn into old hat for you. So get that contract, pay your taxes, and stay outta trouble.
