Article 5 min

How to File Taxes When You’re Self-Employed or Freelancing

Freelancing and side hustles can be financially rewarding, but they also introduce a new layer of complexity to your taxes. From receiving 1099 forms to calculating estimated tax payments and claiming business deductions, freelancers face unique responsibilities during tax season. This guide offers an overview of what independent workers need to know to stay compliant and potentially save money.

Summary

💼 Receiving Payments From Clients

If you’ve done freelance or contract work, you may receive one or more 1099 forms — typically the 1099-NEC or 1099-K — from your clients. These forms report the income you earned, and the IRS also gets a copy, so it’s crucial not to ignore them. Even if you don’t get a 1099, income from your side gig still needs to be reported, including cash payments. Accurately documenting all income is key to avoiding tax troubles and staying on the IRS’s good side.

Takeaways:

• Clients may issue 1099-NEC or 1099-K forms to report payments. Report all income, even if a 1099 isn’t issued.

Key Terms

• 1099-NEC: A form used to report nonemployee compensation.

• 1099-K: A form reporting payment card and third-party network transactions.

🧾 Making Estimated Tax Payments

Unlike employees, freelancers must often pay taxes quarterly using Form 1040-ES. The U.S. tax system operates on a pay-as-you-go basis, and delaying payment until tax time may result in penalties. If you’re married and your spouse has a regular job, adjusting their W-4 to increase withholding may help cover your freelance taxes. This strategy can simplify things by avoiding the need for quarterly estimated payments.

Takeaways:

• Use Form 1040-ES to make estimated tax payments quarterly. Adjust a spouse’s W-4 to help cover taxes if filing jointly.

Key Terms

• 1040-ES: Used by individuals to calculate and submit estimated taxes.

• W-4: A form employees use to adjust federal income tax withholding.

📄 Filing Your Tax Return at Tax Time

Freelancers generally use Schedule C to report business income and expenses. Gathering your records and organizing expenses can make completing this form easier. Because the paperwork is more complex than a standard return, it may be worthwhile to invest in premium tax software or hire a tax preparer who specializes in self-employed returns.

Takeaways:

• Schedule C is the primary form used to report income and expenses for sole proprietors.

Key Terms

• Schedule C: The IRS form for reporting profit or loss from a business.

🧮 Taking Advantage of Tax Deductions

Freelancers may be eligible for a range of tax deductions related to their business, such as home office expenses, supplies, and mileage. Additionally, if your taxable income falls under certain thresholds, you might qualify for the Qualified Business Income (QBI) deduction — potentially reducing your tax bill by up to 20% of your net business income. Always keep good records and receipts to support your claims.

Takeaways:

• Deductible expenses and the QBI deduction can significantly lower taxes.

Key Terms

• Qualified Business Income Deduction (QBI): A deduction allowing eligible self-employed individuals to deduct up to 20% of their qualified business income.

• Form 8995: Used to calculate the QBI deduction for eligible taxpayers.

💰 Understanding the Taxes You Might Need to Pay

Freelancers must pay self-employment taxes, which cover Social Security and Medicare contributions. For 2024, the Social Security portion applies to the first $168,600 in earnings, and an extra Medicare tax might apply to high earners. Use Schedule SE to calculate and report these taxes. It’s important to factor this into your estimated payments and year-end tax planning.

Takeaways:

• Freelancers pay the full 15.3% self-employment tax. Schedule SE helps you figure out what you owe.

Key Terms

• Schedule SE: The form used to calculate self-employment tax.

• Self-Employment Tax: A combined tax for Social Security and Medicare, typically 15.3% of net earnings.

🏦 Setting Up Your Own Freelancer Retirement Plan

Even without access to a traditional employer-sponsored retirement plan, freelancers can still save for the future using options like SEP IRAs and Solo 401(k)s. Contributions to these accounts may be tax-deductible, lowering your overall tax bill while helping you build long-term wealth. These accounts are especially helpful if you earn significant income through self-employment.

Takeaways:

• SEP IRAs and Solo 401(k)s help freelancers save for retirement with tax benefits.

Key Terms

• SEP IRA: A retirement plan for self-employed individuals and small business owners.

• Solo 401(k): A retirement savings plan designed for self-employed individuals without full-time employees.

🧑‍💼 Hiring Someone Versus Doing It Yourself

If you’re overwhelmed by tax forms and rules, hiring a professional tax preparer may be worth the investment. Be sure they have a Preparer Tax Identification Number (PTIN) and relevant experience. On the other hand, if you’re comfortable navigating tax software, many programs are tailored for freelancers and side gig earners. Choose based on your confidence and the complexity of your tax situation.

Takeaways:

• Hiring a tax pro can save time and reduce stress, but software is a good DIY option for confident filers.

Key Terms

• PTIN: Preparer Tax Identification Number required for paid tax return preparers.

• Tax Software: Digital tools designed to help individuals file taxes accurately.

Conclusion

Filing taxes as a freelancer may involve extra steps, but with good recordkeeping and the right tools or advisors, you can handle your obligations and potentially lower your tax bill. Whether you go it alone or hire help, knowing what to expect puts you in a stronger position when tax season rolls around.