Understanding Freelancer Taxes

For most people, filing taxes is a once-a-year concern, but if you’re a self-employed freelancer, you get the dubious privilege of a year-long tax season. The Internal Revenue Service classifies freelancers as self-employed, and under those rules, self-employed people must file quarterly estimated taxes over the course of the year, plus a standard annual tax return in the spring.

Managing self-employment taxes can be a lot of work, and doubly inconvenient if you’re already busy with long hours and hustling for new business. Worse, misunderstanding taxes can mean a big hit to business finances, especially if you’re already operating on a narrow margin. All these risks makes handling taxes very stressful for some freelancers.

Below we’ll cover the basics on filing taxes as a self-employed contractor.

The Fundamentals of Freelancer Taxes

You’ll need to have a clear understanding of what your tax requirements are as a freelancer. You should know what forms you’ll need when filing, how to determine your self-employment taxes and quarterly estimated tax, and what income to declare.

Freelancer tax forms

As a freelancer, you’ll need to deal with a number of different forms you won’t come across when working for a traditional employer. These include:

• W-9: You should receive a W-9 form to fill out before working with a business as a contractor. It’s similar to the W-2 other workers fill out before being employed at a traditional company. This form is returned to the employer for use in generating the 1099-NEC at tax time.
• 1099-NEC: This document reports what a business paid to someone who is not an employee. The 1099-NEC has a similar function to the older 1099-MISC form (which it replaced). You should receive these forms from any clients that filed a W-9 and paid you at least $600. The form is a record of that compensation, and can be used as a record of those payments on your tax return.
• 1099-K: You’ll receive 1099-K forms as records of financial transactions received through third-party payment networks (for example, if clients paid you through Venmo, you’ll get a 1099-K from Venmo if the total payments it processed exceeds a certain amount). When taxes are filed for 2024, 1099-Ks will be filed for payments totaling $5,000 or more.

Note: You can receive 1099-NECs and 1099-Ks for the same payment, so clear and thorough bookkeeping is necessary to prevent accidentally including the same payment twice on your taxable income.

• Schedule C: Schedule C is a record of profit or loss for a sole proprietorship or similar business (such as certain LLCs). Generally, this is a required form to attach to your Form 1040 tax return as a self-employed person. It lists the specific profits and deductible expenses your business earned over the taxable year.
• Schedule SE: Another schedule attached to your 1040. It’s used to calculate your total self-employment tax (which is separate from your income tax). Schedule SE is mandatory if you earned $400 or more in that income over a year.
• 1040-ES: The form used to estimate taxes on any income not subject to withholding (self-employment income being most relevant to freelancers, but also interest, dividends, rents and alimony). You’ll calculate your anticipated income for the year on this form, and break it into four installments to be paid quarterly.

What is self-employment tax, and why do I have to pay it?

As a freelancer, you have to pay self-employment income on any non-wage work earnings of $400 or more. Self-employment taxes go towards Social Security and Medicare, the way similar taxes are withheld from normal wage earning employees.

The total self-employment tax rate is 15.3 percent, with 12.4 percent going to Social Security from the first $160,200 of income and the remaining 2.9 percent to Medicare from total income.

Why do I need to pay estimated taxes, and why are they filed quarterly?

The IRS wants taxes paid as they’re earned, similar to the way income is withheld from employee paychecks. Without standard withholding or regular paychecks, freelancers and others who file the 1040-ES are required to estimate their total taxes for the year and pay that amount over the course of the year in quarterly installments on the 15th of April, June and September—plus January 15th of the following year.

Forget to pay your estimated taxes? Learn what to do next.

How do I declare income, and what should it include?

Unlike self-employment taxes, there’s no threshold at which income taxes don’t apply. This means you need to report all income you earn as a freelancer on your 1040 tax return.

Preparing for Taxes as a Freelancer

There’s no magic wand you can wave to reduce all the cost and difficulty of paying taxes as a self-employed contractor—short of doing so little business that you fall below requirements to pay, that is, but that’s hardly a solution. However, there are several possible ways to make things easier on you, choosing the right business structure, using deductibles, preparing for tax costs in advance, and hiring professional assistance.

Choose the right business structure for your tax situation

Most freelancers are sole proprietors in the eyes of the IRS, which means their freelancing business is a disregarded entity that doesn’t file taxes on its own. However, other tax structures are available to those who choose to register their business as an LLC or corporation, and some of those options may help successful freelancers and other contractors reduce some of their tax burden.

In particular, freelancers who’ve earned a substantial amount of net profit can potentially reduce their self-employment taxes by forming a single-member LLC and electing to take S-Corp status with the IRS. S-Corp businesses will have to pay unemployment tax and FICA, which self-employed sole proprietors will not, as well as the costs of forming a registered business—but in some cases, the overall savings outweigh any added expenses.

Plus, forming an LLC is a good way to protect personal assets in the event of situations that you might be held personally liable as a freelancer. If you end up being sued over work you did as a contractor, a loss might force you to liquidate business assets like equipment, but the liability protections of an LLC should protect you from losing assets like your home or other personal property.

Learn more about changing your sole proprietorship to an LLC.

Lower your taxable income with deductibles

Deductibles, or “write-offs”, are expenses associated with running your business you can include on your tax return to reduce your taxable income. There are a lot of misconceptions about what counts as deductible for a self-employed business owner, but in general, deductible costs need to be accepted as ordinary in your field of business, or necessary for its operation.

You can list deductibles on an itemized tax return. Potential write-offs include:

• Home office deduction: A home office tax deduction is based on expenses like rent and utilities, as applicable to the percentage of your home that’s exclusively used as a home office.
• Business equipment deduction: The cost of any equipment or supplies necessary to do your job that you purchased yourself. This can also include things like cell phone or internet service, but deducting the entire amount of those costs can cause trouble with the IRS if the phone and internet access is also used for personal matters.
• Education costs: The cost of classes for official certification or to improve work-related skills can be deducted.
• Business registration or licensing: If you require special permits or registration to operate your business, you can deduct those costs.
• Travel expenses: Business-related travel costs, including meals during those trips, can be deducted at varying rates. This does not apply to the expense of commuting to an office space, and you’ll probably get caught if you try writing off personal travel as a “business expense.”
• Taxes. Certain taxes on operating your business are also deductible. For instance, as the “employer” of a “self-employed” person, you can write off 50% of your self-employment tax.

Other potential deductibles include business start-up costs (if you began doing business that tax year), marketing expenses, and postage and shipping costs.

On a related note, you may also qualify for certain non-expense deductions as a freelancer. Notably, pass-through businesses earning $191,950 ($383,900 as joint filers) or less in total income over the year are eligible for the Qualified Business Income Deduction (QBI). This lets you deduct a whole fifth of your taxable income from your return, which can seriously reduce the amount you’ll need to pay in taxes.

Plan ahead and save in advance

One of the smartest things you can do to prepare for taxes as a freelancer is surprisingly simple: open an additional checking or savings account solely for tax payments. Put a portion of every payment you receive in that account.

All you have to do now is leave the money alone until taxes are due. By saving this way, you should have roughly enough money on hand to cover any ordinary taxes based on your income that year.

Read Northwest’s guide to opening a business bank account as a sole proprietor.

Hire an expert

Finally, you can always hire a professional to handle your taxes for you. A certified public accountant, tax accountant or financial adviser can prepare and file your return, while also assisting you with bookkeeping, answering tax or finance questions, and representing your business with the IRS in the event of an issue.

Hiring an accountant or other tax adviser is naturally going to cost more upfront than purchasing commercial tax software or trying to file everything on your own. However, many successful freelancers recommend getting a professional’s help, saying that the personalized tax advice a CPA or similar service provides is a more effective way to save money on your taxes over time.

Tip: If you’re an independent contractor filing a Schedule C, you can deduct some or all of your tax preparation fees on next year’s tax return.