Freelance Taxes: The 3 Tax Options for Freelancers
“Yay, it’s tax season…” said no freelancer ever. But you gotta pay the tax man and here’s how to do it.
Here’s the rub — as a freelancer, there are three ways you might be taxed.
- As a Sole Proprietor
- As an S-Corp
- Or as a C-Corp
We’ll look at each of those in turn.
But first, consider this practical tip:
When you get paid, take 20 to 30% of your profit from that deal and put it into a special savings account. You can then use that money to pay your estimated quarterly taxes and, if you owe more at the end of the year, hopefully you’ll have enough in that account to cover what you owe.
Now, on to your three tax options:
1. Sole Proprietor Taxation
Quick Note: The vast majority of freelancers are probably taxed as sole proprietors. It is often the easiest, most efficient, and cheapest option.
You’ll be taxed as a sole proprietor if:
- You operate under your own name (or a DBA) without an LLC
- You operate under a single-owner LLC and you haven’t filed anything with the IRS to elect a different tax class.
In these cases your freelancer income (and expenses) will be reported on your personal tax return using IRS Form Schedule C. You’ll pay income taxes on that income based on your individual income tax bracket. For most freelancers, this is probably 10 to 25%.
2. S-Corp Taxation
An S-Corp is not a business entity. It is a tax classification.
You’ll be taxed as an S-Corp if:
- You operate under an LLC or a Corporation and you file a special election form with the IRS.
In this case, things are basically the same as sole proprietorship taxation above. HOWEVER, and this is big — the S-Corp must file its own tax return and it must pay you a “reasonable salary.” This means you have a bunch of extra compliance work to do. The upside is you can reduce your tax liability.
Thus, if you make more than a “reasonable salary” then consider this:
- First, congrats! That’s awesome. Want to buy me a beer sometime with all that extra money?
- Second, talk with an accountant about your numbers. He or she may be able to save you thousands of dollars a year.
3. C-Corp Taxation
I’ll be blunt: freelancers shouldn’t choose c-corp taxation. It just creates extra work and the benefits are few and far between.
You’ll be taxed as a C-Corp if:
- You’ve formed a LLC and told the IRS you want to be taxed as a C-Corp. (I’ve never seen anyone actually do this, but it is possible.)
- You’ve formed a C-Corp and you did not file the special S-Corp form mentioned above.
In this case, you’ll be taxed twice. Yes, you read that right. Twice.
The corporation will pay income taxes on its income. Then, when you pay salaries or make distributions to yourself, you’ll pay taxes again.
Ok, now you can get back to more fun things...
…like contracts. Seriously, contracts can be fun. In fact, we’re building a digital contract platform for creative professionals. You can check it out and request a beta invite at contractcanvas.com.
#KeepMovingForward
- Chris
*** Request a free beta invite at ContractCanvas.com ***
*Because I’m a lawyer, I must say this: This article is very general in nature and does not constitute legal advice. If you have legal questions you should speak with an attorney.
