Welcome to the world of freelancing, it’s a journey that you do on your own and may feel isolating but it can be rewarding. We’re here to help guide you through the nuances of paying taxes as a freelancer.
Freelancing has a lot of conditions that you’ve never experienced before in the corporate world – one of the biggest ones being taxes.
In the past, you got a W9 and that was that. Now… it’s not so easy.
In this guide, I’ll tell you everything you need to know about paying taxes as a freelancer. I should know – I’ve been freelancing long enough to know the ins and outs of taxes.
At the end of this piece, you should feel comfortable filing your taxes as a freelancer and you should have answers to all of your questions.
Note: Keep in mind, I’m not a tax adviser. I’m just a freelancer making suggestions. Talk to a tax professional if you want legitimate advice for your specific situation.
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Table of Contents
Do I have to Pay Taxes on Freelance Work?
If you’re asking “do I have to pay taxes on freelance work”, you’re in for a surprise – yes, you absolutely have to pay taxes on freelance work. In fact, you’ll wind up paying more in taxes than you would from an office job.
I’ll get more into detail in a second.
Deductions for a Freelance Worker
I won’t talk about this too much, but it’s important to understand that you have the ability to eat up some of your tax responsibility in the form of deductions. Please refer to a tax specialist from a company like Taxslayer to help you.
The general idea is that things like work-related travel, your home office, education, and equipment can be write-offs for your taxes.
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How Do You pay Taxes on Freelance Work?
Just like any other company, it’s all about money in and money out. By keeping a detailed log of these expenses during the year, filing your taxes becomes that much easier.
Many freelancers decide to perform quarterly reports. This means that four times a year you pay your income tax so there isn’t a big tax at the end of the year. If you haven’t been keeping up with quarterly reports, you might wind up paying an additional (small) fee to the IRS.
During tax season, you’ll file your taxes along with a form called Schedule C. It outlines your income and your expenses in order to calculate your net income.
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How Do Freelancers Pay Taxes?
If you’re a freelancer, your next question is probably “how do freelancers pay taxes?” There’s no need to worry, it’s not as hard as you think. You have two options here – you can either file on your own or bring in a tax pro.
If you’re filing on your own, I would highly suggest HR Block. It is easy-to-use software that basically guides you step-by-step through the process. They also have support and professionals that can help you through the process.
The Process of Paying Taxes
The actual process of paying taxes is easy to understand. In corporate America, your paycheck has a bunch of deductions in it. Among these deductions are federal and state taxes.
Behind the scenes, your employer is also paying a chunk of the taxes in the form of an employment tax.
People who work for a company and have a W9 will see these deductions on their payslip, but it might not mean so much to them. As a freelancer, it’s a little different.
You’re taking home all of the money that a client pays you and there aren’t any taxes taken out. That doesn’t mean that you’re tax-exempt, though – it just means that Uncle Sam is waiting until later to collect the taxes owed.
The difference is that when you deposit (or spend) the check you get from a client, you’re also depositing or spending the taxes that you owe.
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Calculating How Much You Owe
Do freelancers pay taxes on everything or just a part of their earnings? This question is a big one that comes around when it comes to calculating how much you owe to the government.
My tip to most freelancers is to find out how much you profited and set aside 30% of that. As a reminder, your profit is how much you made minus how much you spent on freelancing work.
Some people suggest setting aside 25%, but I always think it’s better to be safe. I’d rather have too much money set aside than not enough.
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The Negative About Freelancing
As a freelancer, you might think that every penny you take home goes to you. The truth is that a lot of it goes to taxes. The experts at Tax Act.
When you work an office job, your employer will pay a portion of your taxes. As a freelancer, you’re on the hook for the full 15.3% of income tax. Not only are you an employee, but you’re also considered the employer!
Filing Taxes on Your Own
There isn’t a ton of paperwork that you need to file taxes on your own. As long as you know your net profit or know how to find it, you’re usually in a good place.
Even if you don’t get tax forms from your clients, you can still figure out everything on your own. Pick a tax software of your choice and get to work – for the most part, they tell you step-by-step instructions. They don’t want you to run into any legal problems.
Make sure you have all of your information handy before getting started. This includes your ID and Social Security Card. Filling out the forms completely is the only way to avoid the IRS tracking you down.
If you made more than $400 in the year, then you have to pay taxes. There’s no way out of it as a freelancer.
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The Steps to Filing Your Taxes as a Freelancer
In case you’re lost, let me boil it down to four simple steps. As long as you follow these steps, you should be on your way to paying your taxes.
Step 1: Find Your Total Income
Think back to when you filed your taxes when you were a full-time worker in an office. Knowing your income was the first step of the process then, and it’s the first step here, too. You can use a free hourly rate calculator to help you a ton.
It’s a little harder as a freelancer because you don’t get a single sheet of paper that tells you everything you need to know for filing taxes. In this case, it’s a matter of doing some digging.
The easiest thing to do is go back through the invoices that you sent clients. This is going to be all the money that you made.
If you didn’t send invoices to clients, then check the accounts that the money went through. If you get paid through PayPal or your bank, you can check the apps or websites to see your income information.
With this information in-hand, you’re ready to go to the next step.
Pro tip: Keep an excel spreadsheet or use a program like Quicken Self-Employment to make this step easier in the future!
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Step 2: Understand Your Deductibles
After knowing your income, it’s time to know your deductibles. This was briefly described earlier. This is the money that you can claim as business expenses for the year. Consulting with a tax pro will help you understand what you can and can’t write off as business expenses.
Things like online courses to further your education in freelancing is an example of a deductible.
This is also the area where a lot of people get in trouble. The most common area that the IRS checks for tax fraud is the deductibles associated with a home office. Make sure you’re being honest as you fill this section out.
For future reference, you should keep receipts of all of your deductibles in one place for easy access.
With your deductibles worked out, let’s move to the next step.
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Step 3: File!
Your income goes into the “money made” section, and your deductibles go into the “money spent” section. As you step through the tax software like Liberty Tax, it will ask you other questions that you’ll know the answers to.
The bottom line is that you need a good understanding of your income and deductibles before you should even start your taxes.
Otherwise, you’ll have to take a bunch of breaks in the middle of filing to do quick math and hunt down paperwork and figures.
You can take your information from steps 1 and 2 and either file on your own or with a tax pro.
Step 4: Open a Business Account
After filing, you should immediately open a business account for your freelancing gig. Why? It makes taxes significantly easier in the future. Use your business account for any money that you make or spend on your business. The total at the end of each quarter will be your net earnings.
It also keeps all of the transactions in one place. You can easily go back through summaries and fill out your taxes even quicker next time.
This is perhaps the best advice I can give anyone who’s a freelancer and getting ready to file their taxes. Making a separate business account saved me so much time and countless headaches!
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I know that was a lot of general information I just told you. Your natural reaction is probably to ask how do you pay taxes on freelance work in your specific case. Well, let me answer some of your questions in this FAQ section.
What If I Don’t Know My Net Profit?
It shouldn’t be too hard to dig through your files and find your net profit. Remember, your net profit is the money you made minus the money you spent. This is only for freelancing work.
I would suggest going through your banking files online and PayPal account (if you get paid on PayPal). Tally up the money that you made and the money you spent. There should be a good paper trail online thanks to these apps.
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What About Opening a Business Bank Account?
There’s no law requiring you to open a business bank account. I always suggest it because it makes things a lot easier (it was step 3 in the process above).
I open a business bank account and anything that pertains to freelancing goes through that account. At the end of the day, that is my net profit. Every transaction in or out can be used in my taxes each quarter.
When Do Freelancers Pay Taxes?
Freelancers typically pay taxes quarterly. Quarterly means four times a year or every three months. The official date for filing taxes is the same as everyone else – April 15. If you file with Intuit, you can file up to 3 months early.
The quarterly due dates are also June, September, and January 15th.
What if I Underpaid in Taxes?
If you underpaid, that’s a problem. You’ll owe the remaining balance come tax day. Additionally, they’ll charge you a little late fee.
What if I Overpaid in Taxes?
Overpaying is good news. You’ll get your money refunded the following tax year. It’s always better to overpay than underpay.
I Didn’t Save Enough, and I Can’t Afford the Taxes – What Can I Do?
First off, take a deep breath and relax. The IRS has been taking taxes for longer than either of us have been alive, so they’ve seen people in your situation before.
The bottom line is that you still owe this money, but the IRS might help you out a little. You can put together an installment plan with the IRS (that might include additional interest charges). You can also file for a short-term extension that pushes your due date back to August.
Even if you can’t afford the taxes, you legally still need to file by April 15 or else you’ll owe even more.
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What is a 1099?
A 1099 form is the freelancer’s version of a W9 form. It tells the IRS how much you made and subsequently how much you owe. This is the form that answers the question “how do you pay taxes on freelance work?”
Even if a client doesn’t send you a 1099, you legally have to file every single penny you made during the year as a freelancer.
Is There a Way to Omit Some Money I Made?
Let me make this very clear – failure to claim money you made as a freelancer is super illegal and the IRS will figure out. They can see the money that goes into your account, and if it isn’t all accounted for, an audit will set you back even more than you owe.
Please be careful here. You can’t outsmart the IRS by purposefully omitting some money you made. If they find out, you’ll owe even more. This isn’t a gamble that’s worth it in the end.
Why Do I have to Pay Taxes on Freelance Work?
Anyone who makes money Freelancing (above a certain amount) in this country has to contribute. That’s just the way the laws are set up. There’s no way to wiggle your way out of this one, you’ll just have to do it.