As an employee, your employer withholds taxes from your paycheck and remits them to the government on your behalf. But as a freelancer – that’s no longer the case. Paying taxes is 100% on YOU. Here’s how to report your freelance income and meet your tax obligation.
What is Freelance Income?
First of all, let’s get clear on what freelance income is. Freelance income is money you earn outside of an employer-employee relationship. It’s cash you bring in as an independent contractor or self-employed business owner. (Remember, as a freelancer, you’re an independent contractor AND you own a small business!)
A tell-tale sign: If you filled in Form W-4 when you started working with a new entity, you’re an employee. Your employer will withhold taxes for you and send you Form W-2 at tax time.
But, if you filled in Form W-9 at the start of a new working relationship, you’re a freelancer. Your client will pay you the full agreed-upon amount, and then you’re responsible for your own taxes. At tax time, you’ll typically receive form 1099-MISC from each client you earned more than $600 from that year.
How Much Do You Have to Make to Report Freelance Income?
If your net freelance income is $400 or more, you have to report it to the IRS. Net income is what you were paid minus any business expenses you incurred (more on expenses later!).
So, if you made $500 doing client work this year, and you spent $300 to do it, you don’t have to report those earnings. That’s because your net freelance income was only $200.
But — if your expenses were only $100, you would have to report the earnings because you met the $400 net freelance income threshold.
Myth buster alert! Many freelancers who have gone before you falsely believed that if a client did NOT issue them Form 1099-MISC (because they didn’t earn the $600 threshold), they, in turn, did NOT have to report that income.
Don’t be like them. Account for every dollar you earn — whether you receive a tax document or not. Future you will be grateful for your organization and attention to detail.
Related Reading: How to Budget with a Variable Income
How Much You Should Save for Taxes
Since you’re required to pay taxes on your own, it’s a good idea to set some of your earnings aside for this purpose. That way, you won’t have to scramble to pay your tax bill. You can just dip into your tax savings account and withdraw enough to cover your liability.
So, how much should you save for taxes? It depends on a number of things such as:
- How much you earned
- How much you spent to operate your freelance business
- Where you live/do business (you’ll have to cover federal, state, and local taxes as applicable to where you are)
- If you have W-2 earnings as an employee
Storytime: During my first year of freelancing full-time, I socked away 30% of my income. It turned out to be way too much – but it was a nice $10,000 payday for me after tax season when I got to transfer the excess money back to myself!
Since there are several variables involved here, I recommend chatting with an accountant to determine how much to save. They can provide some guidance tailored to your specific situation.
Important note: Your business structure (i.e., sole proprietorship, LLC, corporation) influences how you pay taxes. But, for the purposes of this article, the assumption is you’re a sole proprietor (a company of one with no formal business structure).
What is the Self-Employment Tax?
In addition to taxes based on location, you’ll have to pay what’s called the FICA tax, which covers Social Security and Medicare. When you have a traditional J-O-B, your employer pays half of your FICA obligation for you.
Now, as a freelancer, you’ll have to pay all of it on your own. This is known as the self-employment tax, which will cost you just over 15% of your net freelance income each year.
Because of the self-employment tax, it’s possible to pay more in taxes as a freelancer than as an employee.
Use Expenses to Reduce Your Tax Liability
But! You have a financial superpower that you can wield to reduce your tax liability. You can deduct your freelance business expenses from your income.
There are important rules to know and follow beyond the scope of this article, but if you bought or paid for something that’s related to your freelance business, you can probably write it off on your taxes.
Some examples include:
- Your new business laptop
- Business coaching
- Admission to a networking event
- An online course
- Your home office
Related Reading: What Tax Deductions Can a Freelancer Take?
This can’t be overstated: Be sure to track every penny you earn and spend within your business. That way, you can maximize your tax deductions AND have an accurate account of your income. You’ll thank yourself at tax time!
How to Report Your Freelance Income
Speaking of tax time – how do you report your freelance income and pay taxes as a freelancer?
Just like when you’re an employee, you’ll file your full-year taxes by April 15th each year. But, the way you account for your earnings will change a bit.
Chances are, you’ll use Schedule C on Form 1040 to report your annual freelance business profit or loss. But, as a freelancer, you may also need to file quarterly estimated taxes with the IRS.
That’s because Uncle Sam doesn’t want to wait a full year to get tax revenue from you. Your obligation to file and the amount you have to pay will depend on your earnings and expenses from each reporting period.
Here are the reporting periods to keep in mind:
- 1/1 through 3/31 is due 4/15
- 4/1 through 5/31 is due 6/15
- 6/1 through 8/31 is due 9/15
- 9/1 through 12/31 is due 1/15 of the following year
You should file if you expect to owe more than $1,000 in tax for that reporting period.
You can figure out your quarterly estimated tax payments on your own using Form 1040-ES. Then, you can file and remit what you owe by mail or electronically via The Electronic Federal Tax Payment System (EFTPS).
But, if dealing with accounting tasks isn’t your forte, partner with a professional. I’ve used an accountant, and I don’t regret it.
Freelance Income Tax Calculators
There are a number of freelance income tax calculators available to help you get a sense of what you’ll have to pay.
Here’s a couple to play around with:
Remember, these are designed to give you ballpark information only. They don’t account for your specific circumstances.
There you have it – a crash course on reporting freelance income and paying taxes as a freelancer. Hopefully, you feel more comfortable handling this responsibility now.
Obligatory disclaimer: I’m not an accountant, so please consult with a tax professional as needed.
Have questions? Book a FREE 15-minute call with me here.
Learn by listening? Download this podcast about how to deal with taxes as a freelancer.