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.
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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.
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 7-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).
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.
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.
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.
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.