In my last installment, I went over general taxes as a single or married-filing-separately adult. In this one, I want to focus on how to file taxes as a freelancer.
In addition to regular income tax, freelancers must pay “self-employment tax,” which starts after you earn over $400 in one year from freelancing.
As a note, I chose to become a single-member LLC, or limited liability company, in order to protect personal assets from business assets. However, because I am a one-person LLC, it is taxed as an individual. The IRS considers single-member LLCs to be “disregarded entities,” meaning it is taxed the same as a sole proprietorship or single person, but I can claim all business expenses and tax deductions.
You do not need an EIN if you are an individual or a single-member LLC. You can just use your social security number. If you want one, though, just fill out the EIN form on irs.gov.
Forms You Need
- 1040 Schedule C or Schedule C-EZ
- 1099’s and 1098’s for interest, dividends, and pension distributions
Freelancer Tax Rates
In addition to the general income tax, freelancers who earn more than $400 in profit (income minus expenses) must pay a self-employment tax of approximately 15.3%. The self-employment tax basically covers social security and Medicare taxes. Regular salaried employees have these taxes taken out automatically and freelancers must do it themselves.
In order to be prepared for tax time, it is highly recommended that you set aside about 35% of all earnings to save for paying your taxes.
You can use the Schedule SE 1040 form to figure out how much self-employment tax you should have paid.
What is a Schedule C or Schedule C-EZ form?
The Schedule C form is also known as a “Form 1040, Profit and Loss” and is a tax form used to report income from a sole proprietorship or single-member LLC. One must be filed if you have a for-profit business and are regularly involved in the business’s activities. It is attached to your 1040 form for filing.
If you had less than $5000 in business expenses, you may qualify to file the Schedule C-EZ (typically less detailed).
You will fill out the Schedule C form the same way as a normal 1040 but also complete the “Part 1 Gross Income” section using a Profit and Loss Statement. Then fill out the “Part 2 Expenses” section with all the things you spent money on for your business, such as advertising, fees, office expenses, etc.
Profit and Loss Statement
Also known as a P&L, Income Statement, Statement of Earnings, or Statement of Operations, a Profit and Loss Statement is a summary of all of your revenue minus your expenses for the quarter or year.
Accounting software like QuickBooks can create one for you based on the numbers you put in or an accountant or place like H&R Block can help you create one using your records of earnings and expenses.
What is a 1040-ES form?
The 1040-ES form is the “estimated tax for individuals” form which helps you figure out your estimated taxes for the previous year. This form is generally used for earnings from self-employment or freelancing.
The main difference between this and regular 1040s or other tax forms is that you are “estimating” your gross income. The IRS recommends using your previous year’s income as a starting point.
This is different from the Schedule SE 1040, which figures out how much self-employment tax you should have paid.
What is a Deduction?
A great thing about being a freelancer or business owner is that there are a ton of business expenses you can claim on your taxes.
A “deduction” is a write off based on your expenses. These are tax breaks!
Tax deductions are NOT a reduction in taxes but are actually a tax CREDIT. Meaning it reduced the amount of taxes owed overall instead of reducing your actual taxable income.
Things that are freelancer tax deductions (and there are many more!): your home office (you can deduct part of your rent/mortgage, electricity, internet bills, etc.), wear and tear on your vehicle, office supplies, office furniture, your computer, meals or entertainment you took a client to, work travel expenses, software and online tools you pay for, business costs like insurance, part or all of your health insurance costs, education or licensing costs, your website, and more!
Keep track of your expenses on your own with a simple spreadsheet to show every time you pay money for anything business related.
What is a 1099 form?
Anyone or any company who pays you more than $600 in a year must report it to the IRS and give you a 1099 form by February 15th of each year, which will be included in your taxes. Anything under $600 must be individually reported by you. You will list the “miscellaneous” income on the 1040 Schedule C form. You’ll put the total on the “gross receipts” line. This is just a total, not an itemized list of where the smaller amounts all came from.
If YOU used any contractors or freelancers, you will also need to file that and give those people a 1099 if it was over $600.
A 1099 is similar to a W-2 form you would receive from an employer reporting what they paid you.
So, the Schedule C form helps you calculate your profits and losses and overall income from your business, then you fill out the Schedule SE 1040 to find your self-employment tax. Then fill out the 1040-ES and all accompanying paperwork, add in all deductions, and you’re basically good to go.
Your income will be reported on a 1040, and the actual annual return is filed as the 1040 and attached Schedule C form.
For a full-time freelancer or business owner, it is highly recommended you work with an accountant or firm which specializes in small businesses, as they will know all the deductions and forms and can help you think of all possible deductions you may not know about. It also ensures you’re paying taxes properly.
But even if you’re working with a professional, it is important as a freelancer to know what you are taxed on, what can be deducted, how to keep track of it all, and understand your earnings.
- Keep records of everything you spend!
- You can pay estimated taxes either quarterly or annually.
- Use an accounting software or professional.
- Deduct everything!
Was this helpful to you? I am planning to have a “How to Adult” series with in-depth information like this but on many different topics, including buying a home, finding a job, personal finances, and more. Have ideas or something you think I should include? Let me know in the comments!