How To File Taxes For Freelance Work (The Simple Guide)

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Taxes

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Tom Smery

Tom Smery is a certified CPA for over a decade. In his free time, he writes articles to pass on his expert knowledge on taxes and accounting. Thomas has a wide range of deep knowledge on 1099 taxes, and finance topics. You can find him fishing when he is not preparing taxes for his clients or writing about accounting.

The best way to file taxes for freelance work depends on a variety of factors. The standard advice of filing quarterly taxes is generally a good idea but depending on your situation it isn't always necessary - or even the best strategy. When deciding how to file taxes for freelance work there are several decisions to make once you understand your tax responsibilities.

Note: If you want a sure-fire way to organize your freelancer taxes and reduce your tax liability, try Bonsai Tax. Our app can send you filing reminders, scan your bank/credit card receipts to discover potential tax write-offs and maximize your tax savings. Users typically save $5,600 from their tax bill. Claim your 14-day free trial today.

3 Basic Questions About Your Freelance Work You Need to Answer

Before we get into how to file your self-employed tax return, let's review three questions you need to ask yourself.

Is Your Freelance Work a Side-Hustle?

Taxes as a freelancer vary in terms of what your obligations are based on your entire tax situation. If your freelance work is a side-hustle and you are also receiving W-2 income then you have some options.

From the IRS perspective, they just want you to pay your taxes and particularly care how - as long as they are paid on time.

If you don't want to deal with filing quarterly taxes for your freelance work, you can simply adjust your W-2 withholdings to compensate for your freelance income. As long as everything evens out at the end of the year there is no risk of paying a tax penalty.

Social Security and Medicare Taxes (Or Self-Employment Tax): How Much Are You Making From Freelance Work?

It is interesting to note that the threshold for filing an income tax return begins at $12,000. This means if your W-2 income is less than $12,000 then you technically don't have file taxes (although you should because certain tax credits are refundable).

For freelance work, the threshold is only $400 in gross income. Once you surpass the $400 threshold you must begin to pay self-employment tax.

The reason for this once you pass the $400 threshold you must pay self-employment taxes (Social Security and Medicare taxes). You still do not pay "income taxes" until you pass the $12,000 floor but you do have to pay the self-employment taxes on your freelance income.

Social Security tax is 12.4% and Medicare is 2.9%. So, you will be responsible for paying 15.3% on your earnings.

Note: For an easy way to calculate you Social Security and Medicare taxes, try our self-employment tax calculator for 1099 workers. The free tool will quickly add up how much you owe in taxes as a freelancer depending on how much money you earn and your filing status.

The distinction can be tricky to understand if you are not familiar with the different types of federal taxes. Most people think of taxes as this wholistic beast but there are actually a variety of different types of taxes.

Social Security and Medicare taxes are not "income" taxes because the money technically goes towards only Social Security and Medicare. On the other hand, "income taxes" can be used to fund any government spending which is why they have different thresholds for when filing becomes necessary.

Are You Outsourcing Your Work or Have Employees?

If you are outsourcing any of your to other freelance workers then your self-employment tax obligation will change. You will be required to not only file your taxes but also provide the Form 1099-NEC to any applicable freelancers you farm work out to. Prior to 2020, the 1099-MISC was used to report non-employee compensation. The 1099-MISC was not replaced entirely, only the non-employee compensation portion.

If they are employees then you will also have the employer-side obligation of withholding taxes and submitting them to the IRS.

Payroll taxes are the most common type of tax you will withhold and submit to the IRS on a quarterly basis. Even if you are self-employed and working as a sole proprietor, the payroll tax obligation will ensure you need to follow the same tax regulations as any other small business.

The 2 Core Federal Tax Payment Schedules You Need to Know

Estimated Quarterly Tax Return Payments

Taxes are due as you earn income. This is why if you receive W-2 wages the taxes are taken out of every paycheck. Your employer (depending on their size) submits the withheld amounts to the IRS monthly or quarterly.

As a freelancer, you are considered to be self-employed by the IRS. Rather than requiring you to submit your self-employment tax payments every time you receive a payment, you can submit your payments quarterly. Obviously the need to file every time you generate income is excessive.

This assumes you are a sole-proprietor or are working under a single-member LLC (SMLLC). The IRS considers an SMLLC to be a non-entity which means from a tax perspective, you are treated like a sole proprietor.

As a sole proprietor, you are required to submit quarterly estimated self-employed tax payments if you expect to owe at least $1,000 when filing your annual taxes. The deadlines to pay estimated taxes are spread out throughout the year. The estimated tax quarterly payments schedule is:

April 15 of the current year (Q1 - income earned from January 1 to March 31)
June 15 of the current year (Q2 - income earned April 1 through May 31)
September 15 of the current year (Q3 - income earned through June 1 to August 31)
January 15 of the following year (Q4 - income earned September 1 to December 31)

The benefit of using the estimated tax schedule is you do not have to calculate your actual tax obligation. You can submit an estimated payment based on last year's gross income unless you expect to earn significantly more than last year.

Your estimated tax payments should cover your income so if you see a spike in income, it might be worth redoing your estimated tax calculation for upcoming quarters. You could always use Form 1040-ES to figure and pay your estimated taxes.

Avoiding Tax Return Penalties - Even If You Underpaid Your Estimated Amount Due or Filed Late

Estimated tax return payments make it easy for you to budget for your quarterly tax obligation but if you meet the following criteria then you can avoid paying a penalty - even if you file late or underpay your estimated taxes due.

Your estimated taxes due payments equal 100% of your tax burden the previous year
You've paid at least 90% of your tax bill for the current year
You owe less than $1,000 in taxes after subtracting your withholdings and credits

If you send in less money than you owe, you'll simply owe the IRS the remaining balance when you file your annual tax return on April 15 (you may receive some penalties).

Annual Tax Filing

The annual tax filing for freelancers is the same as your annual tax return. The only difference from a W-2 employee is which form is filed. As a freelancer, you will be reporting your income on Schedule C. This is also where you will include any deductible business expenses which result in the total taxable income.

What About State and Local Taxes?

State and local tax return regulations will vary by location. Most states and localities will follow the same tax deadlines as the IRS but this is not universally true. If you have questions about State or local taxes it is essential to either contact the applicable government departments or consult a local tax professional.

How to Reduce Your Taxes as a Freelancer

Even though the IRS may consider you a sole proprietor there are tax deductions available to reduce your taxable income. At a granular level, it is always best to consult with a tax return professional but there are several categories of tax deductions that typically are applicable for freelancers.

The following list excludes "common expenses" such as Cost of Goods Sold and advertising expenses which are costs that are expected to be incurred during the normal course of business. Like all businesses, it comes down to your income and expenses.

Note: The best way to capture all your tax deductions is to use a receipt organizer like Bonsai Tax. Our app would scan your bank/credit card receipts, find potential tax write-offs, organize your deductions and save you thousands of dollars during tax time. In fact, users typically save $5,600 from their tax bill. Try a 14-day free trial today.

Home Office Deduction

The most common deduction for freelancers is the office or home office deduction. The fundamental rules for the deduction is the same regardless of whether you rent an office space or work from home.

You must meet the following requirement to claim this deduction:

You regularly use the office space or space in your home exclusively to conduct business
The office space or room is your principal place of business

If You Have an External Office Space

If you have a dedicated external office space you can deduct all office space expenses. This includes any rent, mortgage payments (if you purchased the building), insurance, and utilities. Based on your situation there may be additional infrastructure costs as well.

If You Have a Home Work Office

As a reminder, to take the home office deduction the space must be used exclusively for business purposes. For example, if you are working from your kitchen table it likely will not qualify for a home office deduction because your kitchen table is used for personal activities as well.

The best-case scenario is having a separate room in your house/apartment as a dedicated workspace. This makes calculating and claiming your home office deduction simple because it is based on square footage. If you have a desk in a room, for example in your living room, the square footage you can allocate for your home office deduction is limited to your workspace (likely the square footage of your desk).

2 Ways to Calculate Your Home Office Deduction

There are two ways to calculate the home office deduction. The IRS refers to them as the simplified method and regular method.

To use the home office simplified method, you take your home office square footage and multiply it by $5.00. This method is best for freelancers that have a dedicated workspace/desk but may not have a dedicated room. The maximum deduction using this method is $1,500.

The regular method divides all of your home operating expenses between personal and business use. For example, you can include all of your utilities, internet, mortgage, and insurance among other costs. If you use this method the calculation is outlined on Form 8829 (which must be filed with your annual taxes) and flows through to your Form 1040, Schedule C.

The regular method is preferable anytime you think that the total cost is greater than $5.00 per square foot. The drawback is it does require you to keep documentation for all of your applicable household expenses which is why for smaller spaces the simplified method is often preferred.

Vehicle Deductions

Similar to the home office, you have two options for your vehicle expense deduction. The most common option for freelancers is to use the standard mileage deduction. The IRS sets a standard mileage deduction which allows you to claim a certain amount per mile driven for your freelance work.

In 2022, the IRS rate is $0.585 per mile for a standard vehicle and $0.565 for motorcycles. To use this method, you simply need to track all of your work-related mileage.

If you have a separate vehicle used solely for your freelance work or use your vehicle for a significant amount of mileage during the year for freelance work then the actual expenses method may be preferable.

Similar to the home office deduction, this method requires you to track all business expenses related to maintaining your vehicle (gas, insurance, and maintenance) and then allocated a percentage of those expenses as "work expenses".

Full-Time Freelancer Deductions

Let's go over some of the deductions available for full-time freelancers. Check out our guide to 1099 deductions to see other available write-offs you may qualify for.

Health Insurance Premiums

If you are a full-time freelancer then you can deduct all of your health insurance premiums. This deduction includes all premiums paid for you, your spouse, and your dependent. An important caveat is you can only claim this deduction if you have a spouse and you are not eligible for coverage by their employer. If your premiums are out of pocket and exceed 7.5% of your total income, the excess can be deducted as a medical expense.

Retirement Plans

The most common retirement plan for a freelancer is the SIMPLE IRA. This type of plan is easy to maintain and allows you to invest in the plan with pre-tax dollars.

Continuing Education

As a freelancer, you may need some form of continuing education. As long as your education "maintains or improves skills needed in your present work" you can claim the expenses as a deduction. The most common examples of this include refresher courses required continuing education, and vocational courses.

What Defines a Verbal Contract?

A verbal contract (formally called an oral contract) refers to an agreement between two parties that's made —you guessed it— verbally.

Formal contracts, like those between an employee and an employer, are typically written down. However, some professional transactions take place based on verbally agreed terms.

Freelancers are a good example of this. Often, freelancers will take on projects having agreed on the terms and payment via the phone, or an email. Unfortunately, sometimes clients don't pull through on their agreements, and hardworking freelancers can find themselves out of pocket and wondering whether a legal battle is worth all the hassle.

The main differences between written and oral contracts are that the former is signed and documented, whereas the latter is solely attributed to verbal communication.

Verbal contracts are a bit of a gray area for most people unfamiliar with contract law —which is most of us, right?— due to the fact that there's no physical evidence to support the claims made by the implemented parties.

When is a Verbal Agreement Legally Binding?

For any contract (written or verbal) to be binding, there are four major elements which need to be in place. The crucial elements of a contract are as follows:

Offer and acceptance: An offer is made and accepted by another party involved in the agreement;
Consideration: The involved parties must exchange something of value (money, a service, time, etc), this is known as consideration;
Intention and certainty: All parties must fully understand the terms of the contract and intend to make a legally binding agreement freely; and
Capacity: The parties must have the capacity to legally enter into the contract; they're above age and of a stable mindset.

Therefore, an oral agreement has legal validity if all of these elements are present. However, verbal contracts can be difficult to enforce in a court of law. In the next section, we take a look at how oral agreements hold up in court.

How strong is a verbal agreement in court?

Most business professionals are wary of entering into contracts orally because they can difficult to enforce in the face of the law.

If an oral contract is brought in front of a court of law, there is increased risk of one party (or both!) lying about the initial terms of the agreement. This is problematic for the court, as there's no unbiased way to conclude the case; often, this will result in the case being disregarded. Moreover, it can be difficult to outline contract defects if it's not in writing.

That being said, there are plenty of situations where enforceable contracts do not need to be written or spoken, they're simply implied. For instance, when you buy milk from a store, you give something in exchange for something else and enter into an implied contract, in this case - money is exchanged for goods.

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When are verbal agreements not enforceable?

There are some types of contracts which must be in writing.

The Statute of Frauds is a legal statute which states that certain kinds of contracts must be executed in writing and signed by the parties involved. The Statute of Frauds has been adopted in almost all U.S states, and requires a written contract for the following purposes:

The sale of real estate or vehicles
Real estate leases lasting longer than one year.
Property transfer following the death of the owner.
The case of a party agreeing to pay debt for someone else.
Any contract that requires more than a year to fulfil.
A contract involving and exceeding a specified amount of money (which varies by state).

Typically, a court of law won't enforce an oral agreement in any of these circumstances under the statute. Instead, a written document is required to make the contract enforceable.

Contract law is generally doesn't favor contracts agreed upon verbally. A verbal agreement is difficult to prove, and can be used by those intent on committing fraud. For that reason, it's always best to put any agreements in writing and ensure all parties have fully understood and consented to signing.

How are Verbal Contracts Enforced?

Verbal agreements can be proven with actions in the absence of physical documentation. Any oral promise to provide the sale of goods or perform a service that you agreed to counts as a valid contract. So, when facing a court of law, what evidence can you provide to enforce a verbal agreement?

How can you prove an oral contract?

Unfortunately, without solid proof, it may be difficult to convince a court of the legality of an oral contract. Without witnesses to testify to the oral agreement taking place or other forms of evidence, oral contracts won't stand up in court. Instead, it becomes a matter of "he-said-she-said" - which legal professionals definitely don't have time for!

If you were to enter into a verbal contract, it's recommended to follow up with an email or a letter confirming the offer, the terms of the agreement , and payment conditions. The more you can document the elements of a contract, the better your chances of legally enforcing a oral contract.

Another option is to make a recording of the conversation where the agreement is verbalized. This can be used to support your claims in the absence of a written agreement. However, it's always best to gain the permission of the other involved parties before hitting record.

Written vs Verbal Contracts: What's the Verdict?

Fundamentally, most verbal agreements are legally valid as long as they meet all the requirements for a contract. However, if you were to go to court over one party not fulfilling the terms of the contract, proving that the interaction took place can be extremely taxing.

So, ultimately, the question is: written or verbal agreements?

Any good lawyer, contract law firm, or legal professional would advise you to make sure you formalize any professional agreement with a written agreement. Written contracts provide a secure testament to the conditions that were agreed and signed by the two parties involved. If it comes to it, a physical contract is much easier to eviden in legal circumstances.

Freelancers, in particular, should be aware of the extra security that digital contracts may provide. Many people choose to stick to executing contracts verbally because they're not sure how to write a contract, or they think writing out the contract terms is too complicated or requires expensive legal advice. However, this is no longer the case.

"@bonsaiinc is probably my all time favorite freelance tool. hands down. the team is super responsive and accessible when i have questions."

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Motion design / animation

Say hello to digital contracts

Today, we have a world of resources available at our fingertips. The internet is a treasure trove of invaluable information, platforms, and software that simplifies our lives. Creating, signing, and sending contracts has never been easier. What's more, you don't have to rely on a hiring a lawyer to explain all that legal jargon anymore.

There are plenty of tools available online for freelancers to use for guidance when drafting digital contracts. Tools like Bonsai provide a range of customizable, vetted contract templates for all kinds of freelance professionals. No matter what industry you're operating in, Bonsai has a professional template to offer.

Benefits of written contracts

A written contract makes the agreement much easier to prove the terms of the agreement in case something were to go awry. The two parties involved can rest assured that they're legal rights are protected, and the terms of the contract are sufficiently documented. Plus, it provides both parties with peace of mind to focus on the tasks at hand.

Create Professional Contracts with Bonsai

Bonsai's product suite for freelancers allows users to make contracts from scratch, or using professional templates, and sign them using an online signature maker.

With Bonsai, you can streamline and automate all of the boring back-office tasks that come with being a freelancer. From creating proposals that clients can't say no to, to sealing the deal with a professional contract - Bonsai will revolutionize the way you do business as a freelancer.

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