The IRS has a whole set of special tax preparation rules for the self-employed, and this includes freelancers. The rules are a bit kinder than what other taxpayers are subject to in some ways. But you become both employer and employee when you begin freelancing, even if you don't pay anyone to help you out, and this complicates things.
Any business tax you owe is reported on your personal Form 1040 tax return, and it's calculated on various schedules that go with it. Recordkeeping falls to you, and it pays to get off on the right foot.
Tax Documents Related to Your Income
Everything begins with your income. This is the number from which you’ll subtract your business expenses to arrive at your taxable income. You may not even have to file a tax return if the result is less than $400, but you’ll want to keep all your income and expense documents anyway, just in case the IRS ever wants proof.
Anyone for whom you do freelance work as an independent contractor is supposed to send you a Form 1099-NEC by Jan. 31 of the year following the tax year if they paid you $600 or more. You must still pay taxes on any payments you received that were less than $600, but the entity you did work for doesn’t have to send you the form if all payments made to you totaled less than this amount.
You should have the following income documents by February of the new year:
- Forms 1099-NEC
- Bank records showing payments made to you of less than $600, such as if you just did one quick job for a certain client
- IRS Schedule C
You’ll report your total gross income – before you subtract expenses – on Schedule C, which must accompany your income tax return when you file it.
Read More: What Is Form 1099-NEC?
Documents Related to Business Expenses
The IRS allows you to deduct business expenses that you had to pay over the course of the year for business use, and the list is extensive. The rule is that a qualifying expense has to be “ordinary” and “necessary” to be deductible. An expense is ordinary if most others who perform your line of work spend money on the same thing. It’s necessary if spending that money enabled you to make money.
Get into the habit of saving receipts for anything you pay cash for. You’ll also need corroboration of bigger expenses, such as what you spent on health insurance, transportation, technology and electronics, office supplies, tools, professional dues, or education, because all these things are deductible when you freelance. It’s a good idea to dedicate a separate bank account solely to work-related expenses, and to maintain a credit card that you use only for business purposes. It will save you a lot of aggravation at tax time if all these expenses can be found in one place.
Don’t overlook the home office tax deduction. Even if you spend the majority of your freelancing time on the road or at customer’s or client’s locations, you most likely have an area in your home dedicated to running your small business. The rule here is that you can only use the area for business-related activities. You’re not supposed to take care of any personal business there.
You can deduct a portion of your rent, utilities, homeowners or renters insurance, property taxes and mortgage interest equal to the percentage of your home’s square footage that you use for work. So if your work area takes up 12 percent of your total square footage, you can deduct 12 percent of the total of these expenses. Another, simpler option is to simply claim a $5 deduction for each square foot of your home that you use for your freelancing business, but you can only do this up to 300 square feet.
Read More: Guide to Home Office Deductions
You’ll need certain records at your fingertips so you can tally them up on Schedule C, or pass them to a tax pro, to subtract them from your gross income:
- Bank statements
- Credit card statements
- Lease or mortgage contract
- Other housing expenses, such as utility bills
- Auto records, including miles you drove for business purposes and the overall miles you drove
- Receipts for small work-related purposes
The Self-Employment Tax
You’ll also have to prepare and file Schedule SE with your tax return. This calculates your self-employment tax. The self-employment tax is the Medicare and Social Security taxes that you would split with your employer if you worked for someone else. But you are the employer if you freelance for a living, so you have to pay the whole boat yourself if you earn more than $400.
The good news here is that the self-employment tax is calculated on your net earnings, the number you arrive at when you complete Schedule C after deducting all those freelance expenses from your gross income. You don’t have to pay it on all your earnings.
The self-employment tax is 15.3 percent, but the IRS allows you to claim a tax deduction for 50 percent of that – the part that would have been your employer’s portion if you worked for someone else. This involves filing yet another tax form, Schedule 1. The deduction comes off your overall taxable income on line 16.
Quarterly Tax Payments
It can be helpful to look over all these IRS forms before the year begins so you have an idea of the documents you’ll want to start keeping track of, and the importance of that separate business bank account can’t be overlooked. All payments you receive should go there so you have an ongoing record of how much you’ve earned so far in a given year.
The IRS doesn’t want to wait around for payment until you file your tax return in April and it turns out you have a tax liability. Freelancers are required to pay estimated taxes as they go along, on a quarterly basis.
A separate bank account that received all your deposits – and from which you paid all your business expenses – can tell you exactly how much you took in during the first quarter, and how much you had to spend to stay in business. Now you can take an educated guess on how much of that you’ll owe in taxes. Your other option is to base your guess on prior years’ tax returns if you were freelancing last year. Estimated payments are due on April 15, June 15, Sept. 15 and by Jan. 15 of the following year.
Read More: How to File a Quarterly Federal Tax Return
You Might Need Some Help
There’s no rule that says you have to handle your tax situation yourself. You can hire a tax prep professional to take care of all these forms and calculations for you, but you’ll have to hand over all those 1099 forms and a record of your expenses nonetheless, so you can’t skip those steps. But here’s a little more good news. You can deduct the cost of your tax professional on Schedule C, too.
You can download all forms and schedules from the IRS website if you decide to go it alone, complete with instructions and pointers. And you can always opt for tax software for your tax filing. The reputable providers all have options for the self-employed.
- IRS: Self-Employed Individuals Tax Center
- ProPublica.org: What Forms Do I Need to File My Taxes and Where Can I Get Them?
- Freelancers Union: 7 Tax Tips for First-Time Freelancers
- Score.org: What Tax Deductions Can a Freelancer Take?
- Freelance Austin: Freelance Taxes 101 – Everything You Need to Know for Tax Time
- Business.org: How to File Taxes as an Independent Contractor
- IRS: Forms and Associated Taxes for Independent Contractors
- IRS: Self-Employment Tax (Social Security and Medicare Taxes)
- IRS: Schedule 1
Beverly Bird has been writing professionally for over 30 years. She is also a paralegal, specializing in areas of personal finance, bankruptcy and estate law. She writes as the tax expert for The Balance.