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Self-employment comes with tons of freedom. You decide what rules to play by, when to start your workday, and how many vacation days to take. You don’t have to answer to anyone but yourself—and the IRS.
If you made $400 or more from freelance work last year, the IRS expects you to report that income. So what does that involve? Let’s review a few of the forms you’ll need to file in addition to your standard 1040.
Step 1: Report Freelance Income and Expenses (Schedule C or Schedule C-EZ)
This form serves as the hub for all of your freelance income and expenses. You should receive 1099-MISC forms from any client that paid you more than $600 for work. If you don’t, that doesn’t mean you get a free pass. All freelance income counts—no matter how big or small the dollar amount—so it’s up to you to report it.
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Once you’ve accounted for your income, look at your expenses to see if you can claim any deductions. Common freelance deductions include:
- Office supplies
- Computer equipment
- Travel, meals and entertainment
- Home office
Just keep in mind that this is where the slope can get especially slippery for freelancers. You’ll need careful documentation—like original receipts—to prove an expense was a normal and necessary part of doing business. No mixing business and pleasure here! If your home office also serves as a playroom, it doesn’t count. A trustworthy tax pro can help you reduce your tax liability without raising a red flag for auditors.
If you had $5,000 or less in business expenses, you may be able to file the more simplified Schedule C-EZ form instead. Check with your tax advisor for full details.
Step 2: File Self-Employment Taxes (Schedule SE)
In your typical 9-to-5 job, Social Security and Medicare taxes are automatically deducted from your paycheck along with income tax. But that doesn’t happen when you work for yourself. That’s where self-employment taxes come in.
If you earned $400 or more from freelance work, you owe the IRS money to cover Social Security and Medicare taxes. Self-employment taxes are currently taxed at a rate of 15.3% of your freelance earnings. The good news is you can deduct a portion of your self-employment taxes on your 1040.
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Step 3: Estimate Your Quarterly Taxes (1040-ES)
Since taxes aren’t withheld from your self-employment income year-round, it’s up to you to estimate your taxes for the upcoming year and pay the IRS on a quarterly basis.
Nailing down your tax bill in advance can be tricky. That’s why Dave recommends saving as you go. Set aside about 35% of every freelance check that comes in to cover your income and self-employment taxes so you don’t come up short at tax time. If you don’t pay enough, you’ll be subject to penalties even if you’re due a refund at the end of the year.
Don’t Go It Alone
Freelance taxes can get really hairy, really quick. Avoid costly mistakes by leaning on a tax expert for advice. A true pro can help you reduce your tax bill without skirting your obligations.
If you’re not sure who to turn to, we can connect you with a tax advisor who’s earned Dave’s recommendation for excellent service and advice.