Freelancing and self-employment are on the rise. In fact, an estimated 70.4 million people freelanced in 2022—up from 67.5 million in 2021. And current estimates project half of the U.S. workforce will be self-employed by 2027.
And it’s no surprise why. Freelancing brings a number of benefits, including flexibility, higher earning potential, remote and work-from-home offices, expanded career opportunities, and more.
But there’s one thing that makes most freelancers shudder: taxes.
When you’re an employee, taxes are typically straightforward. Your employer automatically withholds your taxes from your paychecks and issues your Form W-2, and you take your standard deduction. Easy peasy!
Freelancers, however, have a more complicated tax situation. When you’re a freelancer, you are responsible for tracking all income and expenses—usually for multiple clients—calculating and paying quarterly taxes throughout the year, and filing your annual return.
If you’re new to the world of freelancing and aren’t sure where to start, you’re not alone. Use this guide to self-employment taxes to stay on track.
Tracking Freelance Income
All income earned through your business as an independent contractor or from informal side gigs is considered self-employment income and is taxable.
Unlike a W-2 job, where your employer handles income reports, running a freelance business—whether full-time or as a side hustle—means you need to track all your financials yourself. Keep careful records of both your business income and any expenses you may incur.
As a freelancer, you likely work with multiple clients, which can make the tax prep season a little more cumbersome since you will need to report each source of income. If you earned more than $600 from your client(s), they are required to send you a Form 1099-NEC reporting the income paid to you that tax year.
Note: You still need to report all income on Form 1040, even if you earned less than $600 from a client and don’t receive a 1099-NEC from them.
IRS forms you’ll need: 1099-NEC (formerly 1099-MISC), 1099-K (if paid through PayPal or similar services)
Paying Self-Employment Taxes
As a freelancer, you are your own boss. This means you are responsible for both income and payroll taxes (i.e., self-employment taxes). Self-employment taxes are 15.3% of net earnings in 2022 and cover the FICA taxes (Social Security and Medicare) that businesses automatically withhold from W-2 employee paychecks.
As a freelancer, you cover both the employee and employer portions of the tax. Your net earnings, for tax purposes, are your gross income from self-employment minus business expenses.
Use IRS Schedule C to calculate your net earnings from self-employment. And use IRS Schedule SE to then calculate the self-employment tax you owe.
IRS forms you’ll need: Schedule SE, Schedule C
Making Quarterly Estimated Payments
When you’re an employee, your employer withholds your taxes on each paycheck to pay the government throughout the year. That’s why, if you end up paying more than your tax liability, you get a refund when you file.
For freelancers, you don’t have an employer to automatically withhold taxes for you. But you are still responsible for paying taxes on your income throughout the year if you expect to owe more than $1,000. These are called quarterly estimated taxes, which, as their name implies, are taxes you pay on your income every quarter. If you don’t make your estimated tax payments and wait to pay when you file, you could be hit with late penalty fees.
Estimated Tax Deadlines 2023
- January 17, 2023 (for income earned in Q4 2022)
- April 18, 2023
- June 15, 2023
- September 15, 2023
- January 16, 2024 (for income earned in Q4 2023)
If you earned freelance income last year, you can use that to estimate your taxable income for 2023 and divide that into four equal payments. Or you can calculate your income quarterly and estimate your taxes as you go.
You can pay your estimated taxes directly through the Electronic Federal Tax Payment System, or by check through the mail with Form 1040-ES slips. If you owe any more taxes not covered by your quarterly payments, you’ll pay the balance when you file your annual return.
IRS forms you’ll need: Form 1040ES, W-4
As a freelancer, you are considered self-employed by the IRS. This means you must file your taxes as a business owner using IRS Schedule C, Profit or Loss from Business, along with your Form 1040.
E-filing with ezTaxReturn is a fast and simple way to get your freelance taxes done this season. ezTaxReturn walks you through the filing process to help you uncover qualified deductions and credits and calculate your taxable income.
IRS forms you’ll need: IRS Form 1040, IRS Schedule C
Common Tax Deductions for Freelancers
The good thing about working for yourself is that there are many valuable deductions and credits you can claim as an independent contractor to reduce your taxable income.
Here are just a few:
- Home office deduction
- Continuing education
- Mileage on your car
- Self-employment taxes
- Retirement contributions
- Office supplies
- Phone and internet expenses
- Business travel
- Qualified business income deduction
The rule of thumb for business tax deductions is that they must be ordinary and necessary for the course of your business.
Stay on top of your freelance taxes with ezTaxReturn.