The Ultimate Guide To Freelance Taxes

A lot has been said (and written) about the freedom that comes with working as a freelancer. However, what is often left out is that freedom comes with additional responsibility. 

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One of those responsibilities is that you need to pay your own taxes on your freelance income.  

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If you are new to it, you probably have a lot of questions about how to do taxes as a freelancer, what are the taxes that apply on income from freelance work, when to file them and more. 

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We’ve created the ultimate guide to freelance taxes to answer all the questions and more for you.

What to understand when filing taxes as a freelancer

Let’s dive right in and start breaking down how taxation works for freelancers. 

Income (Form 1099 - NEC)

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People who work as full time employees of a business get a single W-2 form every financial year, stating what wages were paid to them that year as well as what taxes were withheld from them and paid on their behalf.

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As a freelancer, you are likely to be working with different clients simultaneously, and that means you have multiple sources of income. 

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At the end of each financial year, you will receive multiple Form 1099 - NEC from these clients, declaring how much you have been paid by each of them.

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If you’ve been paid through other means such as Venmo or PayPal, they ought to send you a form 1099 - K. Copies of these forms are also sent to the IRS. 

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You will need to compile all these forms and confirm your income from these organizations. Your income tax will be based on these reports. 

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In fact, you ought to keep track of and pay taxes on payments for which you may not have received a form 1099 or for gigs that have paid you in cash. 

Self employment tax

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When you’re employed by a business, they take care of your social security and Medicare taxes, for both of which deductions are automatically made from your salary. 

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Working as a freelancer is the same as being an entrepreneur, and that makes paying these taxes your responsibility. The government deems it your responsibility to pay 15.3% of your income every year to represent these taxes. 

Reducing tax liabilities

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Everyone wants to reduce their tax liabilities, and as a freelancer, you are bound to have more business expenses than the employee of an organization would. This also means you are allowed the privilege of certain unique tax deductions. 

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However, bear in mind that all of these deductions can only be claimed as long as the expenses they correspond to have a direct bearing with the operation of your business.

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Let’s now take a look at what tax deductions you could take advantage of.

Tax deductions to look out for

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According to the IRS, any tax deductions applicable to a freelancer ought to be ordinary and necessary. This covers business related travel and lodging, business related food costs, phone and internet bills, office supplies and materials and office expenses. 

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Let’s break down some of these elements more closely.

Home office

Most freelancers tend to work from home, and if that applies to you as well, then these benefits apply to you. The IRS allows freelancers to deduct rent for the portion of your home that you use as a working space, as well as the cost of utilities for that portion as tax deductibles. 

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However, for these benefits to apply, you will need to use that space exclusively for your freelance work only. It cannot be a part of any common area in your home, nor can you use that space to work on any source of income other than freelance work, such as a full time job.

Travel and meals

Expenses related to any travel you need to undertake as a part of your freelance projects, other than traveling to your place of work, can be shown for tax deduction purposes. 

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Similarly, up to 50% of the costs you incur on business meals with clients can also be shown as a tax deductible business expense.

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However, trying to write off a vacation as business travel may find you in some hot water with the IRS.

Education

Upskilling yourself is a great way to stay ahead in the freelancing game, and the powers that be concur. Any education or certifications you undertake to further your professional interests and enhance your business knowledge as a freelancer are eligible for tax deductions. 

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The same applies to any examinations for licenses and registrations that you may undertake. That weekly slide guitar tutorial on Skype will unfortunately not make the cut. 

Equipment and supplies

When a person works as an employee of an organization, things like a computer, printers, cartridges, high speed internet and office stationery are all taken for granted, since the employer provides all of those. 

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As a freelancer, you are responsible for all these expenses.

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The silver lining, though, is that all of these expenses are tax deductible. That being said, you will need to make a strict differentiation between personal and business supplies. 

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For example, it would make taxation a lot easier if you had a separate business internet connection and a separate personal connection. 

Making estimated payments

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As a freelancer in the USA, it is your responsibility to make sure that you pay your taxes. This holds good even if your freelance work is just a source of extra income on the side. This is why employers tend to deduct taxes for their employees with every paycheck.

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While there is a quarterly pay-by date for taxes, waiting until the last minute can make the process troublesome, and you might end up paying penalties and extra interest. 

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There is also the fact that if, for example, the annual taxes you owe are $2,400, you will find it easier to pay $200 a month than $600 every quarter.

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Therefore, the easiest way to deal with taxes is to estimate your monthly earnings, arrive at an estimated tax amount that you owe the IRS, and pay it proactively every month.

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The two forms used for this process are Form 1040 - ES and W - 4. And just to make sure you stay on top of your tax payment schedule, the next deadline for quarterly tax payments is January 23rd, 2023.

Filing tax returns during tax time

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When it is time to file your tax returns, what you will need to do is file a Schedule C. As a freelancer, you are considered the same as a sole proprietor. 

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This means that you will have to crunch your numbers and report all your earnings, expenses, and liabilities as a business.

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Depending on the volume of your business, you may need to depend on a professional tax accountant or advanced accounting software at the very least. 

Simplify payment tracking with automated invoicing

One of the most important things for a freelancer is to make sure that you get paid on time, and that often means you need to follow up with your clients. 

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Fortunately, a lot of new invoice generators allow you to automate a large part of the invoicing process, including generating unique invoices once a schedule has been programmed, and sending payment reminders to your clients.

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We at Prio have a great invoicing tool designed to automate a lot of the invoicing process for freelancers. In three easy steps, our free invoice generator can create invoice drafts for you to approve according to a preset schedule. 

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You can also configure the tool to automatically populate repetitive fields on different invoices for different clients, and even allows you to add the time spent on a project as a unique field using the built in time tracker.

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