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It’s no secret that freelance work is becoming the new norm for many Americans in today’s economy. Nearly half of all millennials freelance, and that percentage is predicted to grow in the coming years. In fact, freelancers are expected to make up the majority of the U.S. workforce within the next decade.(1)
And why not? As a freelancer, you choose your work hours, what projects to take on, and where you work. You get to call the shots!
But the most common reason people get into freelancing is the chance to earn some extra money and supplement their primary income.(2) And let’s be honest, who doesn’t want more cash in their pockets?
However, chances are, your side hustle will impact how you file your taxes. If you’re not careful, you could lose a large chunk of your freelance income to an enormous tax bill.
Tax Basics for Freelancers: What Is the Self-Employment Tax?
If you earn $400 or more from freelance work in any given year, you are responsible for paying the self-employment tax of 15.3%. This tax solely exists to cover your Social Security and Medicare taxes.(3)
Workers who are not self-employed have their Social Security and Medicare taxes taken out of their paychecks automatically—and their employers cover half of those taxes. As a freelancer, however, you’re considered both an employee and an employer. That’s why the IRS wants you to cover the whole 15.3%.
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The Schedule SE tax form helps you calculate your self-employment tax, which you’ll then report on your standard Form 1040. You might also be able to deduct the employer-equivalent portion (50%) of your self-employment tax on your 1040.
Remember, the self-employment tax is in addition to your regular income tax rate. That’s why Dave recommends you save as you go by setting aside around 35–40% of every freelance check you receive in a separate savings account to cover your income and self-employment taxes so you don’t come up short at tax time.
Full-Time Versus Part-Time Freelancing: Calculating Estimated Taxes
Since taxes from your freelance income aren’t being withheld throughout the year, there’s a good chance you’ll need to estimate your taxes for the upcoming year and pay the IRS on a quarterly basis. This is estimated tax, which is typically paid every three months in four equal installments. So how do you know if you need to do this or not?
According to the IRS, you should pay taxes quarterly if you expect to owe at least $1,000 in taxes this year.(4) If you rely on freelance work for most or all of your income throughout the year, you are likely responsible for estimated tax payments.
If you are freelancing on the side in addition to a job that pays you a salary, whether or not you should make quarterly payments depends on how much you’ll make during the year. Nearly half of all freelancers make $2,000 or less each year in freelance income.(5) If you fall within that group, you can probably skip estimated tax payments and just report your freelance income when you file your tax return.
However, if it’s looking like you’ll owe $1,000 or more in taxes, Form 1040-ES can help you approximate how much you’ll make during the year and then determine your estimated taxes based on your projected earnings.
If you underpay your estimated tax—these are estimates, after all—you’ll have to pay the remaining taxes when you file your annual tax return. (And no, though you freelance, you don’t get a free pass. You still have to file your annual tax return by April 15 like everyone else.) On the other hand, if you overpay your estimated tax, you’ll receive the excess amount back in the form of a tax refund.
For estimated taxes, the year is divided into four payment periods with a specific payment deadline for each period:
- January 1–March 31 (Deadline: April 15)
- April 1–May 31 (Deadline: June 16)
- June 1–August 31 (Deadline: September 15)
- September 1–December 31 (Deadline: January 15 of the following year)
Connect with a licensed, trustworthy tax professional to find out if you need to pay estimated taxes.
Keeping Track of Your Freelance Income
As a freelancer, you should receive a 1099-MISC form—which summarizes any miscellaneous income you earned during the tax year—from each client who paid you over $600.
However, many clients now pay freelancers and contractors through PayPal or other online payment systems. If that’s the case, then you will probably receive a 1099-K form from your clients instead. But this form comes with an important caveat: Clients are not required to send you a 1099-K unless they pay you more than $20,000 or more than 200 times.
But just because you didn’t receive a 1099 from a client doesn’t mean you’re off the hook. You still need to report your earnings to the IRS on a Schedule C form.
A Schedule C tax form serves as the hub for all of your freelance income and expenses. First, you’ll report all the freelance income you earned during the tax year in Part I. This includes amounts already reported on the 1099 forms you received from clients and amounts not yet reported for the clients who didn’t send a 1099.
After that, you’ll list your expenses in Parts II–V to see if you can claim any deductions. If you had $5,000 or less in business expenses, the more simplified Schedule C-EZ might be best for you.
You will want to connect with a tax pro to make sure you are filling out the right forms.
Deductions Freelancers Can Claim: Using Tax Deductions to Cut Your Tax Bill
Tax deductions lower your taxable income, potentially reducing your tax bill and saving you hundreds of dollars in the process. And as a freelancer, you get to claim a bunch of them!
But many self-employed professionals aren’t taking advantage of tax deductions. In fact, 73% of freelancers don’t deduct any expenses at all.(6) That means some freelancers are paying more taxes than they have to!
As a freelancer, you can claim deductions on expenses that, according to the IRS, are "ordinary and necessary" for the operation of your business. But always keep in mind that when it comes to deducting expenses from your side hustle, you can’t mix business with pleasure! Your business expenses must be used exclusively for freelance work; trying to deduct travel expenses for your summer family vacation isn’t going to fly. (You may fly, but you won’t be deducting your flight costs on your taxes.)
Some of the most common deductions for freelancers include:
- Advertising and marketing
- Office supplies
- Computer equipment and software
- Travel and business meals
- Home office
Careful documentation and detailed bookkeeping–like saving all your original receipts and invoices—can help you prove that those expenses were vital to your business, which will save you money come tax season.
That might be easier said than done since one in four freelancers have trouble keeping track of expenses.(7) Don’t be one of these haphazard folks! Opening a separate checking account specifically for freelance work-related transactions is a good solution, helping you separate work expenses from personal ones.
There’s more good news for freelancers on the tax front. As a result of the recently passed tax reform legislation, most freelancers will get to deduct 20% from their freelance income—meaning they won’t pay taxes on that 20%. For example, if you made $5,000 from your photography side hustle this year, you can shave $1,000—or 20%—off your taxable income.
You might also want to check and see if you’re eligible for the Earned Income Tax Credit (or EITC/ETC)—a refundable credit that cuts taxes owed for workers with low to moderate income.
From Freelancer to Small Business Owner: Should I Incorporate My Side Hustle?
Is it time to upgrade your freelance work to a full-fledged business? That’s a question many freelancers ask, especially when their business starts gaining some serious momentum.
The truth is, there’s no tax advantage to incorporating. The only thing it will do is create a stand-alone entity that’s liable for its own actions. For example, if you have a lawncare side hustle that you incorporated into a small business and someone sues you for accidental damage caused during one of your jobs, they can’t come after your personal assets.
If you’re just starting out as a freelancer, you probably don’t need to worry about setting up a corporation. Dave says you only need to incorporate your side business or sole proprietorship if you meet one of the following conditions:
- You are going into a business in which you are likely to be sued.
- You have substantial personal assets you want to protect.
- Your business has grown and is a target for lawsuits.
If you go that route, ask your tax advisor which business structure they would recommend. A qualified tax professional can help you make the right choice.
Find a Quality Tax Professional
Taxes are complicated enough as it is—and they only get more complex when you throw multiple streams of income into the mix. But the crazy thing is that only 20% of freelancers seek help from a tax professional for tax or bookkeeping advice.(8) One of the biggest mistakes you could make as a freelancer is to try and go it alone when tax season comes around.
Dave’s nationwide network of tax Endorsed Local Providers (ELPs) can help. Work with a top-rated tax advisor who will take the time to help you understand your tax situation and make sure you get every deduction you’re eligible for. Find a tax professional in your area today!