TAX DAY: the two most stressful words in the English language. Yes, tax season is upon us again! And if you aren’t stressed about the fact that you have to give the government a chunk of your hard-earned money, you will be stressed if you’re trying to figure out the income tax process on your own.
You may not be new to filing a tax return but, in recent years, many people have quit their conventional jobs and have turned to freelance and gig work. Now, they are unfamiliar with how to file taxes in this new situation.
Although the best way to know if you are filing your taxes correctly is to talk to a tax professional, we will discuss a few fundamental principles of how to report your freelance income. These are things all freelancers should know, even if they do choose to work with an accountant. The more you know about how to keep good records throughout the tax year, the less time you can spend worrying over your taxes.
Do You Have to File Taxes?
The simple answer? Yes.
Every U.S. citizen has to file taxes if they earned income within the year. This includes U.S. citizens living outside the United States, even if they are permanent residents of another country.
The more complicated answer? It depends.
Your gross income, filing status, and employment status all have a bearing on your eligibility to pay taxes. Freelancers and gig workers must file a tax return if they have net earnings of $400 or more.
Why Do Freelancers Have to File if They Make $400?
Freelancers and gig workers are considered self-employed, which means they have to pay the self-employment tax. A self-employed person is eligible to receive Social Security and Medicare when they reach retirement age, the self-employment tax accounts for these things. An employer would normally withhold these taxes from an employee’s paycheck. Since freelancers do not have an employer, they are in charge of paying these taxes themselves.
For the year 2022, you must file a tax return if you have net earnings of $400 or more from gig work, even if it's a side job, part-time, or temporary.
Tax Forms for Freelancers
Now that we know who must file, let’s talk about how to file.
The 1040 Form is the main tax refund form. Additional forms must be attached to it to report income from various sources. The forms that each person needs to attach vary depending on the person and circumstances. The following chart shows common forms.
Main tax form
1040-SR for seniors
1040-NR for non-residents
1040-ES for estimated tax payments
Additional tax forms for freelancers (gig workers/ self-employed persons)
Schedule C to report income as a sole proprietor
Schedule SE to calculate and pay the self-employment tax
Additional forms sent to taxpayers from other entities
W-2 Forms from employers who withhold taxes
1099-NEC from a business that paid an independent contractor more than $600 in 2022
Starting in 2023, freelancers may receive form 1099-K from third-party payment processors (e.g. PayPal or Venmo) if they received $600 or more in payments through their platform
Freelancers must use Schedule C when filing as a sole proprietor. On this form, they report any profits or losses from their freelancing business, as well as business expenses incurred during the year.
Schedule SE determines the amount owed for the self-employment tax. The Social Security Administration uses the information from Schedule SE to calculate a person's benefits under the social security program.
NOTE: Freelancers can incorporate their business. This may provide a few advantages regarding tax exemptions, legal protection, etc. However, filing taxes for a corporation is much different than what is discussed in this article.
Every business incurs startup and running expenses. The IRS allows self-employed individuals to deduct (“write off”) these expenses from their gross income. What expenses can they write off? They can include:
Communications services, such as phone or Internet
Hardware and software
Legal and professional services
Fees charged by third-party payment processors
What does all this mean?
Let’s say you are a freelance writer (present company included 😃) and you buy a new computer for your writing business. You also subscribe to software like Grammarly, SurferSEO, Wordtune, etc., to enhance your writing. Those are all business expenses that you can write off from your taxable income.
Of course, different freelancers will have different expenses. The most important thing to remember is to only write off expenses that are normal to your industry. Like, if a freelance writer working from home writes off car maintenance expenses, you can bet that they will be a prime target for an audit.
An interesting expense to note is that of communications services. Phone and internet use are the lifeblood of some freelance work. However, it is a gray area whether to deduct these services if they are partly for work and partly for personal use. The best way to handle this situation is to use separate accounts and devices for work and personal life.
Schedule C filers are the most frequently audited. Avoid an audit by steering clear of outrageous or unusual business expenses.
Estimated/Quarterly Taxes for Freelancers
The IRS requires that taxpayers pay their taxes throughout the year in quarters. As mentioned on the 2023 tax form, you owe estimated taxes if both of the following apply:
You expect to owe at least $1,000 in tax after subtracting your withholding and tax credits.
You expect your withholding and tax credits to be less than whichever of these two options are the smaller for you:
90% of the tax to be shown on your 2022 tax return, or
100% of the tax shown on your 2021 tax return.
NOTE: Payment requirements are subject to change year by year.
There are good reasons to pay estimated tax. First and foremost, if you do not pay the right amount of estimated tax, you may have to pay a penalty. Secondly, it will be difficult to come up with the entire sum of taxes owed at the end of the year. Plus, if you end up paying more in your estimated taxes than what you end up owing, you get a refund.
What if You Don’t Receive Income Evenly Throughout the Year?
As fellow freelancers, we all know what it’s like. Some months you make enough to pay rent in advance, and other months you have crickets for clients. Freelance income does not often come evenly. So how can you pay estimated taxes if it’s hard to estimate your yearly income?
One solution is to calculate what you owe based on what you have already earned during the quarter. This method requires spending more time and attention on your taxes throughout the year. But remember, it’s worth it to spend a little extra time staying ahead of things if it means you get to avoid the end-of-year panic.
You can also use the Annual Income Installment Method. Follow the instructions in the worksheets here to see if this is the right method for you.
When Should You Pay Estimated Taxes?
Generally speaking, estimated taxes are due:
April 15 for the period between January 1 to March 31
June 15 for the period between April 1 to May 31
September 15 for the period between June 1 to August 31
January 15 of the next year for the period between September 1 for December 31
Sometimes these dates are adjusted due to unforeseen circumstances, national holidays, or weekends.
NOTE: Estimated tax payments are based off of the previous year. If this is your first year as a freelancer, be careful not to miscalculate what you owe. Remember, you’re paying taxes for January to December; anything you earn after December belongs to the next tax year.
Tax returns are generally due April 15th. Start the process early so you have time to overcome any challenges or surprises you might encounter.
Keep track of income and expenses
Keep records of money you receive and collect receipts for your expenses to make it easier to complete your tax return at the end of the year. Take time each day, week, or month to update your records. Consider using free accounting software such as Wave. Some software come with the ability to send invoices and receive payments all on one platform, making it very easy to keep track of your income. You may also want to look into having a separate business bank account to keep business and personal expenses separate.
Tax requirements change every year. Stay informed by looking over tax instruction manuals from the IRS and from your state.
File state taxes
Don’t forget that each state also requires residents to file taxes. Each state’s requirements differ greatly, so talk to a tax professional or research information from your specific state.
NOTE: Official federal and state tax websites end in .gov—these are the best places to look for accurate and current information.
Commonly Asked Questions
When can I file taxes?
Tax season opens on a different date every year, but it’s typically in the fourth week of January. It extends until mid-April. The last day to file taxes is normally April 15th.
How much should freelancers save for taxes?
A good rule of thumb is to save about 30–40% of what you earn to cover both federal and state taxes.
Can I file taxes for free?
Yes. One way is to download and fill out all your tax forms by yourself. Otherwise, several companies, like H&R block and TurboTax offer a free tax filing service for simple tax refunds. More complicated cases will have to pay for the service. The IRS also provides a list of providers that offer guided free filing.
How can I pay the taxes I owe?
The IRS provides several options to pay owed or estimated taxes. They include paying online, by phone, mobile device, cash, check, or money order.
Check out these IRS payment options to explore the different possibilities.
Without a doubt, freelancing is gaining momentum in many varied industries. As each freelancer’s circumstance is different, so is the way they file taxes. However, basic tax filing principles apply to all.
When filing your tax return as a freelancer, remember…
Schedule C reports income from freelance businesses
Schedule SE calculates the self-employment tax
Certain expenses incurred while running a freelance business can be written off your taxes
Paying quarterly taxes helps avoid penalty fees and a huge tax debt at the end of the year
Preparing for taxes throughout the year makes tax season much more bearable and helps avoid miscalculations
Yes, paying taxes can be a pain, but it does not have to be a major cause of stress. Being up-to-date with current tax requirements can get you through the tax season relatively unscathed. Follow these fundamental principles and make this tax season the easiest you’ve ever had!
Written by Ashley Hughes