Editor’s Note: Use the referral code MORGAN you’ll get your first month on Collective.com (the tax service I personally use) for free.
I love being a graphic design freelancer.
As a self-employed artist I get to be my own boss, set my own hours and control my own destiny.
But I admit I hate worrying about taxes.
And I doubt I’m alone in that sentiment.
The truth is, taxes can be a bit more complicated for a freelancer than they might be for a regular W2 employee.
And the thought of making that already annoying process of filing taxes even more difficult than it already is can be a stress-inducing thought for most freelance hopefuls.
But here’s the good news, if I can find a way to cope, anyone can.
In this article, I will try to answer some of the most commonly asked questions about taxes as they pertain to freelance – in layman’s terms – and offer tools and guidance that will hopefully make the entire process a bit easier and less terrifying.
Before we begin, it’s important to note that I am not an accountant nor am I a tax professional. I am just a freelancer who makes 6-figures a year and wants to share my personal tax journey with y’all so that you can get a better understanding of how the process works.
Always seek professional guidance from a tax professional, a CPA or the Internal Revenue Service – a.k.a the IRS – when in doubt.
First, let’s start with the basics.
Is freelance taxable income?
In the United States of America, the IRS defines a self-employed individual as someone who:
- Carries on a trade or business as a sole proprietor or an independent contractor
- Is a member of a partnership that carries on a trade or business
- Are otherwise in business for themselves
Freelancers mostly fall into the first category.
So yes, freelance work is taxable income. And it doesn’t matter if freelance work is just a side gig or your full-time job. What matters is your total income.
You are required to file an income tax return if your net earnings from self-employment are $400 or more in a calendar tax year. If you earn less than $400 in gross income a year your “business” is considered to be more of a “hobby”.
Remember, gross income is defined as earnings before business expenses (including tax deductions). Net income is defined as take-home income after business expenses.
Deductible business expenses are things like pro-rated utilities and rent/mortgage interest (if you work from home or have a home studio), advertising fees (like business cards), art supplies, health insurance premiums, vehicle expenses (like mileage when used for the business) and more.
Also, if you’re in the business of selling tangible goods, those goods may also be subject to sales tax on top. of regular self-employment taxes.
Editor’s Note: While I want to focus on freelance income for the sake of simplicity in this article, it’s also important to note that there’s a stipulation that even those who netted less than $400 in a calendar year may still have to file an income tax return if they meet any of the additional requirements listed in charts A, B, and C (pages 10-12) of this document. Again, it’s always best practice to ask an accountant or tax advisor for advice or refer to IRS.gov.
What do I need to do to prepare?
If you listen to any of the advice in this article, I hope it’s this section. Because I’m about to drop some truth bombs.
When I was starting out, I assumed it would take a while to earn any “real” money from my freelance business. So I told myself I would just worry about semantics later.
I didn’t set aside extra money, I didn’t create dedicated accounts and I didn’t carefully track my income and transactions.
In short, I was a fool. And I paid dearly for it come tax time. My stress levels were off the chart.
Do as I say and not as I do (did).
Here are a few action steps you can take in the beginning to make the entire process run much more smoothly:
- Form an LLC and get an EIN (I recommend Rocket Lawyer for just the EIN or Collective for a one-stop shop)
- Open a dedicated business checking account
- Get a dedicated business credit card account (or a regular credit card that you use only for business)
- Register for a Quickbooks Essentials account and start tracking your income and expenses
If you’re not quite sure what to expect before your first tax season, it may also be a good idea to set aside at least 25% of each paycheck in preparation.
It’s so much easier to be organized from the beginning. I don’t want you to need to backtrack as I did and scramble on tax day to figure out what you owe.
Even if you think you’ll ultimately end up hiring an accountant or bookkeeper to take the process over, most will still ask you to set up a QuickBooks account. Rip off the bandaid now.
If you need help getting started with QuickBooks, there are loads of tutorials online.
I find Quickbooks horrifically complicated and just let Collective do it for me.
How do you file taxes if you are a freelancer?
So how do freelancers pay taxes? Freelancers are expected to file both an annual return and make estimated quarterly tax payments.
A quick warning before we dive in – it’s completely normal for this process to seem overwhelming. It’s overwhelming for a lot of independent contractors, myself included.
There’s no shame in hiring a professional to take the reins and help guide you through the process.
There are services available for as little as $290 per year designed to help self-employed freelancers with their taxes. For most small business owners this is nothing in the grand scheme of things. I’ve included a few other recommendations (with promo codes) at the bottom of this article.
Making quarterly estimated payments
First of all, don’t worry, this doesn’t mean you need to “do your taxes” five times a year. Quarterly estimates are much easier than filing your annual taxes and typically only require one tax form.
You pay quarterly estimated payments as a method of paying Social Security, Medicare and income taxes because you don’t have a traditional employer who would otherwise automatically withhold these taxes from your paycheck.
Freelancers can determine what the estimated quarterly taxes should be using Form 1040-ES, which includes a worksheet. You will need a prior year’s tax return in order to do this calculation.
If you are in your first year of self-employment, just make a best guess on how much income you expect to receive for the year.
Don’t worry, if you over or underestimate you’ll just need to complete another 1040-ES form the following quarter to compensate accordingly.
You can make your payments to the IRS each quarter by either using one of the blank vouchers provided on the 1040-ES form by mail, or you can pay using their Electronic Federal Tax Payment System (EFTPS).
If you plan on using the EFTPS to file online, you will need to enroll at least two weeks in advance of the quarterly filing deadline. A Personal Identification Number (PIN) is required to file and will arrive within 5-7 business days via U.S. mail after you enroll.
Quarterly tax due dates
The IRS’s quarterly filing schedule, at the time of this writing, is as follows:
- April 15th (1st quarter for Jan 1-March 31)
- June 15th (2nd quarter for April 1-May 31)
- September 15th (3rd quarter for June 1-August 31)
- January 15th (4th quarter for September 1-December 31)
Filing annual returns
You will also need to file an annual return each year for your business. The 2021 annual return deadline is April 15, 2022. The 2022 annual return deadline is April 15, 2023.
To do this, you will need two tax forms.
First, you’ll need a Schedule C to report your profit and loss.
You should receive a 1099-MISC, or a 1099-NEC, from each client who paid you $600 or more in a calendar year to help make these calculations a bit easier.
You may also receive a 1099-K if your payments come from a service like PayPal or Upwork.
If one of your clients fails to send this information, just keep track of this income on your own and report it as such on your Schedule C calculations.
Editor’s note: You are obligated to report all of your income to the IRS regardless of whether or not a client sends a 1099-MISC form.
Next, you’ll need a Schedule SE (Form 1040 or 1040-SR) to calculate your self-employment tax. You will use the calculations from Schedule C to fill out Form 1040.
At the time of this writing, the current self-employment tax rate is 15.3%. And 92.35% of your net earnings from self-employment are subject to this tax (eek).
There are ways to structure your business to reduce that self-employment tax burden (like forming an S-Corp) which we will discuss later on in this article.
Typically speaking, advantages to using an S-Corp start to come into play around the $80,000 mark.
Again, it’s probably easier just to hire someone or pay a service to provide custom guidance and handle these annual tax filings for you.
How much should I set aside for taxes?
For freelancers, a good rule of thumb is to set aside at least 25-30% of your earnings for your taxes.
You should also note that freelancers rarely receive tax refunds unless an accidental overpayment has been made.
Kiss those days of looking forward to your tax refund goodbye.
Accountants for freelancers: Letting someone else handle the dirty work
As mentioned before, I never actually do my own taxes.
As a freelancer, my time is extremely valuable and I recognize that taxes are not my forte. My time is better spent elsewhere.
That’s why I hire other people to handle it for me.
Below are the two services I personally recommend:
1. TurboTax Live Self-Employed with Full Service
This service is ideal for freelancers making less than $80,000 per year.
With TurboTax Live Self-Employed, you can receive unlimited tax advice from a tax expert or CPA who will prepare, sign and file your taxes for you.
At the time of this writing, this service costs just $290 (for federal filings, state filing may cost extra if applicable) and you only pay when you file. The base service does not include bookkeeping.
2. Collective: The Back Office Platform
This service is ideal for freelancers making more than $80,000 per year.
This is the service I currently use.
Collective is a relatively new company, founded by freelancers, for freelancers. They “get” it.
Collective will also help you set up an S-Corp and payroll services which takes the edge off the previously mentioned self-employment tax.
On average, the company boasts that they save their members an average of $16,845 in taxes per year by filing this way.
Services in their base subscription include:
- Help with LLC formations, S-corps, operating agreements and Tax ID numbers
- Quarterly tax estimates and salary recommendations
- Full-service bookkeeping
- Business and individual income tax returns
- Year-round tax and accounting support
- Free bookkeeping software (approx $40 per month value)
- A Gusto subscription (a $45 per month value)
- Payroll training and support
This service genuinely changed my freelancing life and I cannot recommend it enough.
Check out my full review of Collective here.
And because I am such a fangirl of this company, they also helped me out with a custom promo code for my readers (I am honored to be a part of their pilot VIP affiliate program).
If you also happen to be a content creator like myself, I’d wager a bet that you will also enjoy their affiliate program, so be sure to inquire about it upon signup.
At the time of this writing, Collective is offering their base service for $297 per month when you pay annually or $349 per month when you pay month to month. And if you use the referral code MORGAN you’ll get your first month free.
And if your spouse is not self-employed, and you file jointly, Collective will file their W2 each year as well, free of charge.
Are you a freelancer or small business owner? Share your tax stories in the comments and don’t forget to connect with me on social using the links below.