The short version
- Freelancers are typically self-employed and are responsible for paying their own taxes
- Freelancers are responsible for federal, state, local, and sales taxes
- Choosing the right business structure for your freelance business can save you money and headaches
- account software as a freelancer can make doing your taxes much easier
- Hiring a licensed tax professional can help you build a well-structured freelance business, and save you time and stress come tax time.
Self-employed vs. full-time employment taxes
When you are self-employed or have income outside of your normal job, there are additional tax forms you need to fill out, and unique taxes you need to pay.
When you are employed at a full-time job (W-2 employee), taxes are typically taken care of for you. Your employer automatically calculates how much to withhold from each paycheck, and sends those taxes to the IRS on your behalf. Employers also pay for a portion of your taxes for you, splitting the tax bill on Social Security and Medicare taxes.
But when you are your own employer — i.e., self-employed — you are responsible for calculating and sending in your tax payments throughout the year. This includes sending quarterly estimated tax payments to the IRS and (if applicable) your state revenue department. Depending on your business, you may also need to pay state sales and local taxes.
This can get complicated. That’s why it’s important to find a licensed accountant (CPA or Enrolled Agent) who can help you set up your business structure, set up tax payments, and file your return. And, hopefully, keep the IRS off your back!
More: Taxes and investing: What first-time investors need to know about filing taxes
Which business structure should you choose?
There are a few business structures available to freelancers, and there are advantages to each, depending on the state you live in and your business:
Most freelancers start as sole proprietors. This is the default state of your business that doesn’t require filing any extra paperwork.
Sole proprietor businesses allow you to report your business income and expenses on your regular income tax return, utilizing IRS form Schedule C. This makes it easier for individuals, as you don’t have to prepare a separate return for the business. However, there are not as many tax advantages available.
Limited liability corporation (LLC) + S Corp
Forming a Limited Liability Corporation (LLC) is a good idea for most business owners because it offers some protection of assets. However, it is considered a “disregarded entity” by the IRS and does not necessarily affect your taxes.
Many freelancers elect to form an LLC and have it taxed as a Small Corporation, or S Corp. This offers certain tax advantages but is best suited for freelancers earning about $100,000/year or more (typically).
S Corp election requires that you pay yourself a “reasonable salary” from the business, commensurate with the market. It also requires more paperwork, and you will need to file a separate tax return for the business itself.
While C Corporation (C Corp) election is typically reserved for large businesses, you can create your business as a C Corp and still take advantage of the S Corp tax savings. There are very few reasons for freelancers to elect C Corp status, because they are typically taxed twice (known as “double taxation”), and C Corps are more complicated to set up.
C Corporations allow small businesses to issue shares of ownership in the business and protect shareholders from business debt or lawsuits. This can benefit freelance businesses that expect substantial income and want to bring in investors.
But in most cases, the headache of setting up and maintaining a C Corporation as a freelancer just isn’t worth it.
What taxes do freelancers pay?
Freelancers pay income taxes at the federal and state level (if applicable), but may also be on the hook for local taxes.
Here’s a breakdown of the taxes you’ll need to pay as a freelancer:
Federal income tax is paid to the IRS and is based on your net income from your business (minus other deductions and credits). These taxes are paid within the national tax brackets, which vary based on your taxable income and marital status.
As a freelancer, you're responsible to pay your own Social Security and Medicare taxes as well. This is sometimes referred to as “self-employment taxes” (or SE tax), as you must pay the full amount. Salaried employees only pay half, and the other half is paid for by their employer. The current self-employed tax rate is 15.3%.
More: 2023 federal income tax guide
State income taxes are required in most states (except Wyoming, Washington, Texas, Tennessee, South Dakota, Nevada, Florida, and Alaska), and are paid to the state tax department. Estimated taxes are typically due at the same time as federal taxes and are expected to be paid on a quarterly basis.
You will also be responsible for filing a state tax return in addition to your federal tax return. If you're being taxed as a corporation, you'll need to file a corporate tax return with your state.
Some local jurisdictions around the U.S. have their own tax requirements, and you may be required to pay additional income tax. You can find more information on your area through the local chamber of commerce website or local office.
As a freelancer, you are probably not paying sales tax, but some states do require you to collect and pay sales tax on services (West Virginia, South Dakota, New Mexico, and Hawaii). This would require applying for a state sales tax permit to be able to sell your services.
If you sell physical products, you will most likely collect sales tax and pay it to your state tax department. Every state has different requirements. Review your state and local requirements before engaging in business.
Making estimated tax payments
As a freelancer, you are required to send in estimated tax payments on a quarterly basis for both your federal and state taxes. This is self-calculated and is based on your income and estimated tax liability. It will likely fluctuate throughout the year.
To make an estimated tax payment to the IRS, you can set up an account at irs.gov/payments or make a payment directly through your bank account or debit/credit card. The IRS enlists third-party payment processors to handle your payments, and you can choose which one you prefer. Credit cards and debit cards do incur a transaction fee while paying from your bank account directly is free.
To make estimated payments to your state (or local jurisdiction), you will need to set up a payment account with your state tax department.
Common tax deductions
As a business owner, you have more flexibility with tax deductions, as operating your business comes with expenses. Here are a few common tax deductions that freelancers can use to lower their tax liability:
If you work from home, you can deduct the office in which you work if it is not used for any other purposes. The simplest way to do this is to add up the square footage of your office and divide it by the square footage of your home. This shows you the percentage of the mortgage/rent and utilities you can deduct on your tax return.
For example, if you live in a 2,000-square-foot home, and your office is 100 square feet, you can deduct 5% of your mortgage, taxes, and utility costs.
More: Tax implications when working remotely
Travel and meals
Travel and meals are not a free-for-all to deduct expensive lunches and vacations, sadly. The IRS requires business travel and meals to be for the operation and/or development of your business.
Business travel and lodging at a work-related conference, for example, is 100% deductible. However, the meals during that travel can only be deducted at a 50% rate. In addition, meals while you are away on a work trip can only be deducted if you are facilitating business, like meeting with potential clients, or closing a business deal. Again, these meals can be deducted at a 50% rate.
Continuing education and certifications are a great way to keep up-to-date on your craft, and are tax deductible. Taking an online course to improve your business, or gaining an extra certification to help you pick up new clients can be done tax-free, as long as they are 100% business-related. For example, you can’t deduct that yoga certification for your accounting business, but getting your continuing education credits to keep your CPA license is deductible.
More: The 7 best online investing courses for 2023
Equipment & supplies
As a freelancer, you may require equipment to run your business and regularly go through consumable supplies. As long as these expenses are “necessary and ordinary” for the operation of your business, they are 100% deductible.
But some larger equipment purchases can’t just be deducted right away. You may need to amortize the deduction over the life of the equipment.
If you drive to a client’s location for your freelance work or drive a few miles each week as part of your business, you can deduct the mileage on your tax return. The mileage deduction rate for the IRS is very generous: It includes estimated depreciation and maintenance and is taxed at a rate of 65.5¢ per mile as of January 1, 2023.
For 2022, the rate was 58.5¢ for January 1, 2022, through June 30, 2022, and 62.5¢ for July 1, 2022, through December 31, 2022.
How to file your taxes as a freelancer
If you are filing your taxes as a sole proprietor, you will file your standard 1040 tax return but will include Schedule C for your business income.
If you're filing as a corporation, you'll need to fill out a separate business tax return utilizing the 1120 form (1120-S for S Corp).
If you choose to do it yourself, there are several popular tax software options available. And you'll probably benefit from paying for small business accounting software, such as Quickbooks, to help you organize your income and expenses.
It can also be helpful to work with a licensed professional, such as a Certified Public Accountant (CPA) or Enrolled Agent (EA). Both are required to pass rigorous testing and are recognized by the IRS to represent you. While licensed tax professionals may cost more, they can help you set up and protect your freelance business. They may also save you from making costly tax mistakes.
Preparing for next year’s taxes
As a freelancer, it’s important to keep records of your income and expenses, including notes on your travel, business meals, and mileage. That means filing away your receipts in a semi-orderly manner. Expense tracking apps can help you keep your records organized throughout the year, making it easier come tax time.
Lastly, remember to set aside money regularly for taxes. It’s easy to get caught up in business activities and forget to pay the IRS, but this can come back to bite you in a big way. Open a “taxes” bank account, separate from your business account, and transfer funds there on a monthly basis.
If you can find a quality, licensed accountant to help you set up your business and prepare your returns, you’ll save yourself a lot of headaches, and possibly thousands of dollars along the way.
The takeaway: there are ways to make freelance taxes less taxing
Freelancing is a great way to help you build up a business with the flexibility and freedom you desire. One drawback? The taxes can be a little complicated. However, there are ways to start on the right foot and avoid rushing through your taxes.
Choosing the right business structure, and organizing your finances in a tax-friendly way can help you avoid stress at tax time.
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