More than 50% of the American workforce is expected to be a freelancer by the year 2027. This is great news, as freelancing provides you with the flexibility to design your work life however you want.
However, we know that if you’re a freelancer or contract worker, taxes can be confusing and daunting. From understanding how to claim the right deductions to understanding self-employment tax, freelance taxes can often be more complicated than regular taxes.
But don’t worry, we’ve got five tax tips for freelancers to help make it a little bit easier. Whether you’re just starting or you’ve been doing it for a while, these tips will help you stay on top of your taxes and keep more money in your pocket.
Read on and learn what you need to know about taxes as a freelancer or contract worker this year.
Is There a Difference Between Freelance & Contract Worker?
Though the two terms are often used interchangeably, there is a difference between freelance and contract workers. It doesn’t make much of a difference in terms of taxes. It’s simply nice to know your status.
Freelancers are self-employed individuals who are not committed to a single employer long-term. They typically work on a per-project basis, and they have the freedom to choose which projects they take on.
Contract workers are employees of a company who have been assigned to work on a specific project for a set period. Once they complete the project, their employment with the company ends.
There are pros and cons to both arrangements. For example, freelancers have the freedom to work whenever and wherever they want, but they also don’t have the stability of a regular paycheck. Contract workers, on the other hand, may have more job security but less flexibility.
Ultimately, which type of worker you are will depend on your preferences and circumstances. That being said, when it’s time to file your taxes, you’ll file as a self-employed individual regardless.
How Do Freelance Taxes Work?
The main thing to know about freelance taxes in the United States is that you are responsible for keeping track of how much you owe the government. This isn’t necessarily the case when you’re employed by a company.
For example, if you’re hired as a full-time employee for a marketing agency then the company deducts your taxes from your regular paycheck. They’re deducting your Social Security and Medicare taxes and paying their share of those same taxes for you.
This means that when Tax Day arrives, most employees don’t owe money but instead sometimes receive cash back from the IRS.
When you’re working as a freelancer or contract worker, there isn’t a company that deducts taxes from your monthly paychecks from your clients. You’re that company now and you are responsible for keeping track of how much you owe. It’s a bummer, we know.
This is also why you’re responsible for making estimated tax payments throughout the year. You should be paying quarterly to cover your Social Security and Medicare taxes plus
These payments ensure that you don’t end up owing a large sum of money come tax time. If you don’t make adequate estimated tax payments, you may be subject to penalties and interest charges.
Aside from that, freelance taxes work similarly to regular taxes you’d pay as an employer. You pay income tax at a progressive rate on what you earn. Plus, you can offset that income somewhat by taking advantage of deductions for business expenses.
These can include things like office supplies, travel costs, and professional development expenses. As long as you keep good records of your expenses, you can claim them on your tax return and reduce your overall tax liability.
What Is Self-Employment Tax?
The big difference between paying taxes as an employee of a company and paying them as a freelancer lies in understanding self-employment tax.
Remember, this is what we mentioned above that a regular employer would be paying for you. They would pay their share and also deduct your portion of that tax from your paychecks. As a freelancer or contract worker, you’re responsible for paying the whole share of that tax.
The tax is imposed on net earnings from self-employment, which are defined as the gross income from self-employment minus allowable deductions. How much is that tax?
The self-employment tax rate for the tax year 2022 is 15.3%. This consists of 12.4% for Social Security and 2.9% for Medicare.
It’s important to know, too, that self-employment tax is deductible on Form 1040, Schedule C, and Schedule E. Because it’s technically not an income tax, but rather a payroll tax, it also doesn’t apply to capital gains or investment income.
Aside from this tax, you’re also responsible for paying regular income taxes like everybody else. This means that you’ll need to understand which tax bracket you fall into. This depends on your filing status and total taxable income.
However, there are currently seven tax brackets: 10%, 12%, 22%, 24%, 32%, 35%, and 37%.
How Do You Pay Taxes as a Freelancer?
How do you pay taxes as a freelancer? First, you’ll need to calculate how much money you owe in taxes. This can be tricky if you’re not used to keeping track of your income and expenses, but there are some helpful resources available.
The IRS has a tax calculator that can help you estimate your tax liability, and many accounting software programs can also track your finances and calculate your taxes owed. Well offer some tips and talk about recommended software below!
Once you know how much money you owe in taxes, you can start making payments. You’ll need to create an account with the IRS if you don’t have one. The process is pretty straightforward, though, and the IRS online portal makes it easy to understand how to process a payment.
Likewise, the IRS offers several options for paying your taxes, including direct deposit, credit or debit card, and check or money order.
You can also set up automatic payments so that your taxes are deducted from your bank account every month. This is a great option for those who are financially stable enough to do so. As is the case with anything as a freelancer or small business owner, automation is key.
If you’re worried about being able to pay your taxes on time, don’t worry, The IRS offers payment plans that can help. You can set up a monthly payment plan using the IRS’s online payment portal, or you can submit a request for a longer-term payment plan using Form 9465.
Overall, if you’re diligent about tracking your income and expenses, you should be fine. If you overpay then you can request a refund come Tax Day and receive that cash back.
Tax Forms You Need to Know as a Freelancer
Before you pay your estimated quarterly taxes as a freelancer, you’ll need to gather some documentation. Namely, there are four forms you’ll want to become familiar with as an experienced freelance professional.
Tax form 1099-NEC used to be called form 1099-MISC. It’s a tax form you’ll use to report nonemployee compensation. This includes freelance work, as well as other forms of payment for services that are not covered by traditional employment relationships.
You’ll use this tax form to report the total amount of payment you received during the tax year. This information is then used to calculate your total tax liability.
If you’re self-employed, you will also need to file a Schedule C with your tax return. This form is used to report your business income and expenses.
Finally, you’ll need to provide your tax ID number when filing a 1099-NEC. This can be your Social Security number or your Individual Taxpayer Identification Number (ITIN).
You will also need to provide the name and address of the person or company that made the payment, as well as the amount of money that was paid. See why it pays to keep track of all of your income and expenses throughout the year?
1099-K is a tax form that is used to report income that you receive through payment processing services. This includes platforms like PayPal, Stripe, credit card payments, and other similar transactions.
The form will show the total amount of income that you received through these services during the year. You will then need to report this income on your tax return.
So if you’re a freelancer who uses any of these payment processing services, be sure to keep an eye out for your 1099-K form come tax season. Platforms like PayPal will automatically send you these forms, or you can generate and download them yourself once they’re ready.
Tax form 1040-ES is a form you’ll use as a freelancer or contract worker to estimate your tax liability for the year.
The form includes a chart that shows the tax rates for different income levels, and you use this information to estimate your tax bill. The form also includes a Worksheet for Determining Estimated Taxes, which is useful when calculating your estimated tax liability.
Finally, as you start to build your freelance career, you’ll become very familiar with a W-9. The tax form W-9 is a simple one-page form that you use to provide tax information to the companies you work for.
The form asks for your name, address, and tax identification number, which is typically your Social Security number. The company then uses this information to prepare your tax return.
While the W-9 is a relatively simple form, you must take the time to fill it out correctly. Incorrect information on the form can lead to delays in getting paid or even penalties from the IRS.
5 Tax Tips for Freelancers
Are you feeling more confident about freelance taxes for contract workers and how to estimate your self-employed taxes correctly? If not, then we’re done yet.
Aside from understanding how freelance taxes work, it’s important to understand how to manage your freelance business or side hustle properly. This includes understanding what you can deduct, how to save for your retirement, and more.
Here are five tax tips for freelancers that’ll help you graduate from tax beginner to freelance tax expert.
1. Keep Track of Income & Expenses
As a freelance contractor, it’s essential to keep track of your income and expenses throughout the year. This information will be critical come tax time when you’ll need to report your earnings and deductions to the IRS.
Additionally, knowing where your money is coming from and going can help you budget more effectively and make smart financial decisions as you move forward in your freelance career.
There are several ways to track income and expenses, so find a system that works for you and make sure to stay on top of it throughout the year. There are a few different ways to do this.
One way is to use a spreadsheet to track everything manually. This can be time-consuming, but it’s a good option if you want to have complete control over your finances. Be sure to include columns for self-employment tax, income tax, and also for various deductions.
Another option is to use accounting software like QuickBooks or FreshBooks. This can save you a lot of time, but it comes at a cost.
And finally, you can hire an accountant to do everything for you. This often ends up being the best and most cost-effective option long-term. A professional tax specialist will help ensure you’re applying all of your qualified deductions while also helping you avoid costly penalties.
2. Understand Your Deductions
Speaking of deductions, it definitely pays to understand which deductions apply to you as a freelancer. While there are several deductions (and you should speak to a tax professional about your specific case), here are a few of the most common you likely qualify for.
Cost of Forming a Business
The point of tax deductions is to offset the cost of business expenses. This includes the cost of forming a business, such as incorporating or filing for LLC status. It also includes costs such as licenses and permits needed to operate or even the cost of renting office space.
Home Office Costs
If you use a dedicated space in your home for business activities, you may be able to deduct a portion of your rent or mortgage, utilities, and even home insurance from your taxes.
Of course, you’ll need to keep good records of your expenses and make sure that your home office meets the IRS’s requirements. But if you qualify, taking this deduction can help reduce your tax bill and save you money.
Our expert tip? Sometimes it’s better to take the simplified home office deduction. For most people, the home office deduction is going to be more trouble than it’s worth. Unless you have a very large home office, you’re not going to save that much money by using the direct method.
If you have a small home office and you’re not planning on moving any time soon, the simplified method is probably your best bet. Just take the $5 per square foot deduction.
Equipment & Software
When it comes to software and equipment, there are a few things to keep in mind.
First, you can only deduct the portion of the expense that you used for freelance work. So if you use your laptop for both work and personal purposes, you would only be able to deduct a portion of the cost.
Second, you can only deduct expenses that are necessary for your freelance business. If you’re a graphic designer then a Canva Pro subscription would be considered a necessary expense, but something like a new printer you never use for business purposes would not.
Finally, remember that you can only deduct the cost of the software or equipment in the year that you purchased it. This means that if you bought a new laptop in 2021, you would have wanted to claim that on your 2021 taxes.
3. Pay Estimated Taxes Throughout the Year
Paying estimated taxes can be a bit of a hassle, but it’s important to do it to avoid any penalties from the IRS. When you pay estimated taxes, you’re essentially paying yourself, so that come tax season, you won’t owe a large sum of money all at once.
By doing this throughout the year, you can also avoid any stressful surprises come tax season. So even though estimated taxes may not be the most fun way to spend your money, it’s important to pay them.
When are self-employment quarterly taxes due?
They are typically due April 15th, June 15th, September 15th, and January 15th (of the following year). Keep in mind that each date corresponds to the previous quarter. This means that your payment on April 15th is for taxes owed from January 1st through March 31st.
4. Set Up a Retirement Plan
Another disadvantage of being a self-employed worker is that you work for contracts, not a company. This means that your clients aren’t paying into a retirement plan for you, nor are they offering to match your contributions.
However, this doesn’t mean you can’t still set up and pay into your retirement plan. There are several retirement savings options available to self-employed workers, and setting up a retirement plan is an important way to ensure your financial security in the future.
One retirement savings option for freelancers is an Individual Retirement Account (IRA). An IRA allows you to set aside money for retirement and enjoy tax-deferred growth on your investment.
If you’re just starting, a Roth IRA is probably the best option. Or, you might look into a Simplified Employee Pension (SEP) IRA as another option. With a SEP IRA, you’re able to contribute up to 25% of your net earnings (with a maximum of $61,000 in 2022).
Another retirement savings option is a solo 401(k). A solo 401(k) is similar to a traditional 401(k), but it’s designed specifically for self-employed workers. Both IRAs and solo 401(k)s offer significant tax advantages, and they can be powerful tools for building retirement savings.
5. Automate Your Savings
Finally, one of the best things you can do as a freelancer is automating your savings.
When you automate your savings in a high-yield checking account, you’re automatically sending your profits to an account where the money will earn interest. This means that you’re setting yourself up to have enough money left over each quarter to pay your estimated taxes.
Automating your savings also helps you to keep track of your spending and make sure that you’re always putting away enough money to cover your expenses. Plus, you won’t be tempted to spend your tax money on other things.
The Best Freelance Tax Software
Now, with these tax tips for freelancers in mind, what kind of software should you be using to track your income and expenses? You’ve got a few options. If you’re starting and interested in doing it yourself, software like TurboTax or TaxSlayer are two options.
For example, TurboTax walks you through everything step-by-step online. They have a specific section for 1099 forms and estimated taxes, so you can be sure you’re covering everything you need to.
Like dedicated tax professionals, most of these online tax software offers a “max refund guarantee,” so you can be confident you’re getting the most back from your taxes.
That being said, tax software is designed to simplify the tax preparation process, but it can’t always keep up with the complexities of freelance taxes. As a result, you may end up missing out on deductions or credits that could save you money.
On the other hand, we know that hiring a tax expert can be slightly more expensive. But a tax expert can help you navigate complex tax laws and tax benefits. They’ll ensure that you get the best possible outcome for your freelance taxes.
Ultimately, the decision of whether to use tax software or a tax expert is up to you. Think long-term and consider which option will save you time, money, and stress in the long run. Either way, please keep up with your estimated quarterly tax payments!
Consult With a Freelance Tax Specialist
Freelance tax tips are great for those just getting started. However, when it comes time to pay your taxes each year, you’re going to want a qualified tax specialist in your corner.
At Bennett Financials, our goal isn’t only to make sure you file on time and maintain compliance. Our goal is also to help you legally keep as much of your hard-earned cash as possible with our consultative tax planning services.
Consult with a tax specialist today to get help with your freelance taxes so you can keep more of what you earn. Schedule a free consultation now.