Freelancing has become an increasingly viable career path for marketers. In 2021, 60% of marketers wanted to switch jobs, and many were exploring the flexible freelance life.
When you become a freelancer, you receive all the benefits of being your own boss, but you also have to assume the responsibilities of a business owner when tax season comes.
That can be intimidating to newbies...
The good news is that there are plenty of resources to help you figure out the best tax process for your freelance business.
And It’s worth it, Bailey!
Below, we asked three experts — including a certified public accountant and a long-time freelancer — to break down the basics of freelance taxes, and offer their top tax-season tips for new and established freelancers.
- Rakesh Parikh, CPA and director at One Capital Financial Advisors
- Drew Blumenthal, founder and CEO of Digital Drew SEM
- Andi Smiles, head of content at Collective and small business financial consultant
3 reasons freelance taxes aren't like W-2 employees'
The key reason freelance taxes differ from a full-time employee’s: You’re technically self-employed.
“If you are working for somebody as a contractor, you’re not their employee,” Smiles told Marketerhire. “You provide some sort of services for their business.”
There are three main factors that make filing taxes as a self-employed person different from filing as an employee:
- You have to pay income and self-employment taxes out of pocket
- You can deduct your business expenses from your total income
- You pay estimated taxes on a quarterly basis
Freelancers have to pay more taxes out of pocket.
Freelancers are responsible for two types of taxes: income and self-employment.
- Income tax: Your income tax rates depend on your tax bracket.
- Self-employment tax: Your self-employment tax rate is a flat 15.3% for 2021, and it takes care of your Social Security and Medicare taxes.
Traditional employees pay these taxes too, but their employer automatically deducts their tax bill from their paychecks — and Social Security, Medicare and FICA show up on their pay stubs itemized out, whereas the self-employment tax bundles all those taxes into one, Parikh explained.
Freelancers get more tax deductions.
When it comes to freelance tax deductions, “you need to know how much you're earning, but also how much you're spending,” Smiles said. “Those expenses become your tax deductions. Employees don't have that.”
The money you spend on the following expenses can all count as deductions:
- Self-employment taxes
- Home office updates
- Health insurance
- Business travel
We’ll cover tax deductions in more detail below, in the FAQs section.
Freelancers have to pay quarterly taxes.
When you’re self-employed, you should also plan for quarterly tax payments.
The IRS requires small businesses (freelancers and independent contractors included) to make quarterly estimated tax payments if they expect to owe $1,000 or more in annual taxes. Depending on your state, you may also have to pay estimated quarterly state taxes — more on that below.
These estimated payments go towards a freelancer’s annual tax bill, due on April 15.
Traditional W-2 employees don’t pay these— instead, their employer withholds their taxes and pays the bill.
How to file taxes as a freelancer in 6 steps
When you file taxes as a self-employed individual, the IRS views you as a small business. That means your taxable income is your total income minus your business expenses.
[Taxable income] = [Total income] - [Business expenses]
Tracking and categorizing all your income and expenses can be confusing at first, but we’ll break down the steps for tax filing as a self-employed individual. Then we’ll see what our experts had to say about some of the most common questions about freelance taxes.
Before we get started, a quick glossary of the tax forms involved:
- 1099-MISC: documentation of income that you’ll get from your clients
- 1040: the individual tax return you’ll file on Tax Day, whether you’re self-employed or not
- Schedule C: the part of your individual tax return where you total up your freelance business’s profit (or loss) for the year
- Schedule SE: the part of your individual tax return where you calculate how much self-employment tax you owe
1. Pay quarterly estimated taxes (if applicable).
The IRS requires freelancers who expect to owe at least $1,000 in federal taxes on Tax Day to make quarterly estimated tax payments, as we mentioned above.
(States have their own separate thresholds for quarterly tax payments — in Minnesota, for example, you have to pay quarterly taxes if you expect to owe $500 or more in state taxes.)
Every year, quarterly tax payments are due on the following days:
- Q1 — April 15 [also Tax Day for W-2 employees]
- Q2 — June 15
- Q3 — September 15
- Q4 — January 15 of the next year
When a quarterly tax deadline approaches, you can find an accountant to help you calculate your estimated federal and state taxes.
The IRS Form 1040-ES will help calculate your federal estimated tax payments, which you can mail in or pay online.
The rest of the steps below will walk you through filing your annual tax return.
2. Gather your 1099-MISC forms.
Any client who pays you more than $600 in a year for your freelance work should send you a 1099-MISC tax form stating how much they paid you.
If you accept more than $600 in payments through a provider like PayPal, Square, or Stripe, those platforms will also create 1099-Ks for you, Smiles explained. You can typically find and download these forms in your merchant dashboard.
Gather all of your 1099 MISC forms from the tax year to help calculate your total income.
Keyword: help. You need to track and report all the income you earned, even if a client didn’t send a 1099 form.
3. Use Schedule C to find net income.
Before you file your taxes, you need to determine your net income. You can do this with your Schedule C, which will walk you through tallying up your total income, adding up expenses, and calculating net taxable income.
4. Calculate self-employment income and tax.
Use your net profit (or loss) calculation from Schedule C to complete your Schedule SE form, which gives you your self-employment tax.
5. Calculate income tax.
Fill out the rest of IRS Form 1040, using your total income to calculate your individual income tax bracket and bill.
6. File federal, state and local taxes.
File your federal, state, and local tax returns directly to the IRS, through tax software or with the help of an accountant.
9 FAQs about freelance taxes, answered
Freelance taxes can be confusing, even for the pros.
When Smiles started out as a bookkeeper, she put off her self-employment taxes off until the day before Tax Day, then rushed, skipping over the most impactful deductions because she didn’t have the time (or receipts) to get them right.
Preparation is key. With the right information, you can track your finances throughout the year in a way that makes filing easier.
Here we cover some of the most common questions new and potential freelancers have about preparing for tax season, filing taxes and partnering with a tax professional.
1. How much should I set aside for taxes?
The best way to prepare yourself for tax season as a freelancer is by setting aside between a quarter and a third of your revenue for taxes — no matter how much you’re making.
“If you're new to freelancing and you’re earning $200 a month, you can still get into a practice of saving monthly for taxes,” Smiles said. “The general rule of thumb is 25% to 30% of your net income for taxes.”
“The general rule of thumb is [save] 25% to 30% of your net income for taxes.”
2. Do I need to make estimated quarterly payments?
Probably. If you expect to owe $1,000 or more on your net income, you need to make estimated tax payments each quarter — and even if you don’t, it’s a good habit to get into.
“I would encourage you to pay quarterly taxes, even if it's a minimal amount,” Parikh said.
3. Should you get a separate bank account for freelance income?
In general, yes. Separating your business and personal financial accounts makes it much easier to calculate your total income and expenses.
“I have a business checking account, and then I have a personal checking account. All my [client] payments automatically go into my business account, not my personal one,” Blumenthal said.
Blumenthal also recommends getting a business credit card for your expenses, which makes it easier to calculate deductions and lets you take advantage of business rewards.
4. Is it smart to hire a tax professional like a CPA?
If you like accounting, you might be able to handle filing on your own. But, for most freelancers, it’s worth hiring someone to help navigate the tax laws for self-employed people.
“I have a bookkeeper and an accountant,” Blumenthal said. “I highly recommend every freelancer get one.”
“I have a bookkeeper and an accountant. I highly recommend every freelancer get one.”
- A certified public accountant (CPA) helps with big picture finances and tax advice
- A bookkeeper deals with monthly financial records to help ensure your business stays profitable
The decision to hire an accountant or a bookkeeper also depends on your budget, but the good news is that the money you pay them qualifies as a business expense — so it’s tax-deductible.
5. Does setting up an LLC help with taxes?
Making your business an LLC is mainly about protecting yourself legally — so if your business goes into debt or gets sued, for example, you can’t be held personally liable. Forming an LLC won’t automatically impact your taxes.
However, an LLC does open up new tax options. You can still be taxed as a sole proprietor, as most freelancers are, but you can also opt to be taxed as an S Corp.
Should I set up an S Corp?
This is a tax filing status available to LLCs, and it can lead to major tax savings.
As an S Corp, your business doesn’t have to pay federal corporate taxes or self-employment tax on the profits— which can lower your tax bill.
Setting up an S Corp takes some legwork. You have to start running payroll, “which comes with additional costs and additional paperwork,” Smiles said.
For example: You'll have to start paying yourself a monthly salary, and you'll probably need to invest in payroll software. You’ll also have to file two tax returns as an S Corp owner — taxes for your S Corp and taxes for yourself as an individual.
Smiles said S Corp status is often worth the work for freelancers who…
- Make $80,000 or more in profit a year
- Plan to continue freelancing in the long-term — at least for the next three years
- Foresee themselves hiring employees
“It’s amazing if you're somebody who's like, ‘I’m going all in with my business,’” Smiles said.
“It’s amazing if you're somebody who's like, ‘I’m going all in with my business.’”
7. Should I set up a retirement plan?
If you freelance on top of a job that offers retirement benefits, you might not need to set up another plan. But full-time freelancers should consider their retirement needs and options — and many don’t.
Pew Research found that 54% of sole proprietors and 21% of freelancers had no workplace retirement savings account.
Freelancers can contribute to what’s called a self-employment IRA, or SEP IRA, and they allow for much higher contributions than a traditional 401K, Parikh noted.
Freelancers can contribute up to 25% of their income or $58,000 for 2021 — whichever’s lower — to a SEP IRA account.
(Employees could only contribute up to $19,500 to their 401Ks in 2021.)
The money you contribute to your IRA isn’t taxed as income. Instead, it’s taxed when you draw on the account during retirement, so it’s usually subject to a lower income tax rate.
8. What business expenses can you deduct?
The IRS defines business deductions as those expenses that are “ordinary and necessary.”
Ordinary means the expense is common to your industry, and necessary means the expenses are helpful for growing your business.
Here are some common deductible expenses from your income as a freelance marketer:
- Legal and professional fees, including accountants and bookkeepers
- Contract labor or salaries if you hire employees or independent contractors
- Education, such as marketing skills courses
- Advertising and promotion, including your website, branding services and online ads
- Business travel away from your tax home for more than one day
- Business meals, such as dinner with a client
- Health insurance premiums
- Home office costs, including maintenance and improvements
Home office deductions can be confusing — but if you have a room in your home that’s solely used for business, you can basically deduct a percentage of your rent, mortgage and renovation spend.
“It’s about square footage,” Smiles explained. “Take the square footage of your office space and divide it by the square footage of your home to get the percentage of your home expenses that are business related.”
“Take the square footage of your [home] office space and divide it by the square footage of your home to get the percentage of your home expenses that are business related.”
If you have questions about what qualifies as a business versus a personal expense, you can speak with a CPA or refer to IRS Publication 535, which defines business expenses in more detail.
9. Will I get a refund?
That depends. If your estimated quarterly tax payments end up being higher than what you owe for the year, you’ll receive a refund.
It’s not as common for freelancers as for full-time employees — because typically, employers are cautious.
Employees are “overpaying taxes all year because employers are automatically taking money out, and they're being over-protective [be]cause they don't want to be audited,” Smiles explained.
2 great tax softwares for freelancers
When you pay freelance taxes, you need to track your business income and expenses throughout the year. Here are the two freelancer tools our experts recommend for streamlining your financials and making tax prep easier.
1. QuickBooks Self-Employed.
Price: from $4.50 a month
QuickBooks Self-Employed is one of the most widely used tax apps for freelancers and independent contractors. Made by Intuit, it lets you keep track of your income and expenses all year, and integrates with TurboTax.
If you work with a tax professional, QuickBooks can generate a year-end balance sheet and income statement for your accountant.
Wave’s free accounting software is an accountant-friendly option for bookkeeping and expense recording if you don’t have room in your budget just yet.
“It's good for people who have simplified business structures,” Smiles said.
“It's good for people who have simplified business structures.”
One key perk: It can sync with your bank account and download transactions as they come in.
Don’t let freelance taxes intimidate you
At first, freelance taxes are a lot to take in, and they might make that 9-5 job look a little more appealing. But the more than 56 million Americans who freelanced last year show us it’s possible to figure it all out.
As you build your freelance business, the tax part of it becomes another routine task, not some big hurdle preventing you from being your own boss.
If you’re ready to take the leap, apply to freelance with MarketerHire today.