Freelance work is often attractive to artists because it offers the freedom to choose where and when they work. It also may provide more creative opportunities through creating works for clients with different tastes and needs. Without an employer to deduct taxes from paychecks, however, freelancers may face challenges at tax time.
Employers generally make payroll deductions for federal and state income taxes and for the employee's half of Social Security and Medicare tax, paying the other half themselves. As a freelancer, you are responsible for paying these taxes on your own. That means Social Security and Medicare will take a particularly big bite out of your wallet because you have to pay both the employer and employee portions. You must also figure out the federal and state income tax withholdings.
To determine your tax hit, begin with your federal taxes. To calculate your federal taxes you fill out Internal Revenue Service Schedule C, which details your business expenses and income. You also can list and deduct expenses for using part of your home as an office -- using an IRS worksheet, if needed -- and for driving to and from client meetings. Gross income minus expenses equals your net income. That number goes on line 12 of your 1040 form and also on your self-employment tax schedule form. Generally speaking, you'll also enter that number on your state income tax form.
If your income is less than $113,700 you can typically can use the IRS Schedule SE short form to report and figure the amount of self-employment tax you owe. Otherwise, you'll need to use the long SE form. Either way, follow the directions on the form, which takes you through the process. Although paying both shares of the tax is a bit daunting, you'll be able to deduct the employer-equivalent portion of these taxes from your federal taxable income.
Be sure to keep complete records of your expenses, as well as the amount of time you use items such as your computer for work. Consider paying your taxes as you go rather than having to fork over a lump sum at year's end. You can do this through filing a form 1040-ES and splitting the amount due into quarterly payments throughout the year.
Freelance artists are taxed as sole proprietors unless they've chosen a different legal structure for their businesses. Those structures include limited liability companies (LLCs), S corporations and C corporations. Each handles tax issues differently. Because sole proprietor is the default legal structure, the instructions in this article apply best to that structure. Talk with an accountant about the tax impact of each of these structures to determine which is best for you.
Randi Hicks Rowe is a former journalist, public relations professional and executive in a Fortune 500 company, and currently a formation minister in the Episcopal Church. She has been published in Security Management, American Indian Report and Tech Republic.She has a bachelor's in communications, a master of arts in Christian education and a master of business administration.