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perating a freelance business offers several benefits, including being your own boss, setting your own schedule, and choosing work that you find fulfilling. There are plenty of reasons to love the freelancer life. When it comes to paying taxes, though, the process isn't as straightforward. Employees working traditional jobs have taxes deducted from their paychecks automatically by their employer, but as a self-employed person, you are responsible for filing and paying taxes each quarter for your business.
Understanding how self-employment taxes work, how and when to pay them, and common tax deductions for freelancers will help you come tax time, whether you prepare your taxes or hire a professional. Read on to learn how to file taxes as a freelancer.
What is the self-employment tax?
Self-employment tax refers to income taxes paid by self-employed individuals to the federal government through the Internal Revenue Service (IRS). In a traditional job setting, employers pay these taxes. However, if you are self-employed, you are considered the employer and, therefore, must pay both Social Security and Medicare taxes on your business income. W-2 employees have these taxes deducted automatically from their paycheck, but since you don’t receive traditional compensation, the responsibility for tax payment falls on you.
Who is considered self-employed by the IRS?
Any individual who runs a business or offers a service/trade as a sole proprietor or independent contractor is considered self-employed. The same goes for someone who is part of a partnership that runs a business. As a freelancer, you are considered self-employed whether you freelance part-time or full. If your net earnings were $400 or more over the past tax year, you are considered self-employed and must pay taxes on income earned from your freelance business.
Currently, the self-employment tax rate is 15.3%. The tax rate breaks down into two parts:
- 12.4% for Social Security
- 2.9% for Medicare
While the self-employment tax is a federal tax, as a freelancer, you will also pay state and federal income taxes. Each state handles this differently. Check your state’s tax department website for the most up-to-date guidance on paying state taxes.
When do I have to pay freelance taxes?
Freelancers will file an annual tax return. In 2022, the annual tax return due date is April 18. Another tax obligation is paying estimated taxes every quarter. Estimated tax payments are due in the middle of April, June, September, and January for the previous quarter’s business income.
You can make estimated tax payments online through the IRS website, by phone, in-person at retail partners, and by mail (sent with an estimated tax payment voucher).
To determine how much you should pay on estimated taxes, you can use the IRS self-employment tax and deduction worksheet, which is available on your Schedule SE (Form 1040). You can also refer to the IRS tax rate schedule for guidance on how much to estimate.
What happens if I miss a quarterly tax payment?
With three of the four quarterly tax payments due throughout the year, it’s important to make estimated quarterly payments on time. Penalties for late estimated tax payments or partial payments typically start at 0.5% of the tax owed during that period and increase with each successive month, capped at 25% of the tax owed.
Keeping your business finances organized well in advance of estimated tax due dates can save you considerable stress (and money). If you manage your business finances with Novo, you will have the option to set aside money with Novo Reserves for various business expenses, including estimated taxes. Don’t yet have a Novo account? Learn more about why Novo business checking is the preferred business checking account for freelancers.
What tax forms do I need to file as a freelancer?
The primary tax form for most freelancers is Schedule SE (Form 1040). You'll use this form to report your Social Security and Medicare taxes. You'll also need to use Schedule C to report your taxable income or loss from your freelance business.
Other forms to know include 1099-NEC forms and 1099-K forms. You will probably receive a 1099-NEC form from each of your freelance clients. Businesses use the form to pay non-employees like independent contractors and freelancers.
If you are paid via PayPal, Venmo, or another online payment service, you could receive a 1099-K form too. The government recently made changes to the reporting requirements for the 1099-K form as part of the American Rescue Plan Act. For 2022 and beyond, you must report your income if you receive payment for goods or services totaling $600 or more (regardless of the number of transactions) through a third-party payment network.
Business structure and taxes
Depending on your business structure, you may use different forms to file your self-employment taxes. While many freelancers are sole proprietors, there are other business entities to choose from, including:
- Limited Liability Company (LLC)
Each business entity type comes with its own set of tax liabilities. If you’re just starting out and are unsure which business entity is right for you, learn how to decide what business type to register.
Self-Employment Tax Deductions
Freelancers have several tax deductions available, also known as write-offs, that can lessen tax liability. The IRS requires that deductions be both ordinary and necessary. Any deduction you claim must be something common, appropriate, and helpful within your industry. In other words, all tax write-offs must be business-related and used for business purposes only. You can’t deduct personal living or related expenses as a general rule.
What can you deduct from your taxes as a freelancer? One of the most common deductions is the home office deduction. If you work from home, you may be able to deduct some of your household expenses. Other standard deductible expenses that could lead to a tax refund for filers include:
- Advertising and marketing
- Office supplies
- Office space
- Computer equipment and software
- Business meals
- Education expenses
- Health insurance
- Professional organization memberships
- Business travel expenses
Tax deduction guidelines change from year to year and are based on industry. Consult the IRS for the latest rules and policies concerning available tax deductions.
Tracking your freelance income
One of the best ways to understand your tax liability is to track your freelance income throughout the year. You can do this manually, through spreadsheet software like Microsoft Excel or Google Sheets, or you can use accounting software. On the other hand, bookkeeping services can take that task off your plate if you prefer.
While tracking your income, don't forget to follow your expenses throughout the year. Tracking expenses as you go will save you time when tax season rolls around. Save any receipts and invoices you receive.
How Novo helps freelancers prepare for taxes
If you’re looking for a way to make tax time even smoother, consider opening a free business checking account with Novo. All Novo accounts can integrate with multiple bookkeeping and accounting software options such as Quickbooks or Xero, enabling you to focus on the more critical aspects of running your freelance business while your financial information updates in the background.
On top of Novo’s native accounting software integrations, Novo Reserves is a free feature available to all account holders. It is designed to help business owners easily and automatically allocate their cash inflows and working capital, making it simple to set aside funds for business income tax returns.
Learn more about free business checking with Novo.
Should you do your own taxes or hire a tax professional?
Depending on the complexity of your business financials, you may want to consider hiring a tax professional. If you're just starting out or freelancing part-time, you will likely be able to handle filing your own taxes using tax software and choosing the right business banking platform.
Filing business income taxes is a significant piece of the freelancer puzzle. If you're not comfortable doing your own taxes or if your tax situation is more complicated, a tax professional like a CPA can help you file your taxes correctly. They can also help identify every tax deduction available to you as a freelancer.
As a freelancer, you are a small business owner, whether you do freelance work full-time or as a side hustle. This means you must pay taxes quarterly. Knowing the ins and outs of freelancer taxes is an integral part of running your own business, whether you do it full-time or as a side hustle. It’s also important to keep in mind that the right business banking platform can transform difficult, stressful tax preparation into a fast, easy, and streamlined tax return process.
This page is for informational purposes only and is not intended to be relied upon as legal, financial, or accounting advice. Please consult your own professional if you have any questions.
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