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NGExpert financial copywriter
Page written by Ashlyn Brooks. Last reviewed on July 22, 2024. Next review due October 1, 2025.
Freelancing is a commonly used term for contracting or having outside work apart from full-time employment. In some cases, people supplement their full-time income through freelance work. But a commonly overlooked aspect of freelancing is the tax portion you need to account for depending on your situation.
Here at Swoop, we’re all about helping you grow your small business by connecting you with multiple funding options, such as grants and loans. Although we are not tax professionals, taxes are a large part of running and growing a business. Let’s unpack the details of what you’re up against tax-wise as a freelancer.
Freelance taxes are those individuals must pay on income earned from freelance work. Unlike traditional employees, freelancers do not have taxes withheld from their paychecks by an employer. Instead, they are responsible for calculating, reporting, and paying their taxes directly to the government.
Freelance taxes generally include income tax and self-employment taxes:
Freelance taxes work differently from those for traditional employees; they go a bit deeper than simply filing your tax return once per year with one W-2 and a 1040.
Freelance taxes are generally paid quarterly, with estimated tax payments due on the following dates:
If a freelancer earns $50,000 in a year:
If the estimated annual tax liability (including self-employment and income tax) is $12,000:
If a freelancer’s total income is $50,000, and they have $10,000 in deductible business expenses:
Freelancers need to pay quarterly estimated taxes if they expect to owe $1,000 or more in federal tax when their return is filed. This can be uncertain depending on your line of work and the volatility of the industry you’re in.
If you’re unsure where you stand on this check your previous year’s tax return, if this is your second full year freelancing. Skim through the previous year’s returns and look for a form 1040-ES or “payment voucher”. The rule of thumb is if you owed over $1,000 last year, plan to make the payments this year.
As a freelancer, you will need to file several tax forms, including:
This can also vary depending on whether you have a registered business with an employer identification number (EIN), an LLC, or a corporation (such as an S corp). Also note, that this is merely scratching the surface and we highly encourage you to speak to a CPA or tax specialist to ensure you are fully compliant through the state and federal government.
Here comes the good part. Freelancers can take advantage of numerous tax deductions to lower their taxable income, and these can vary wildly depending on how aggressive you would like to be with deductions and/or the industry you’re in.
This is where keeping detailed records will prove to be valuable. Many freelancers choose to use bookkeeping software for this very reason. While it may seem simple to remember everything you spent money on, keep in mind that you will need to go back over 12 months.
In the beginning, this might not seem like such a big deal but, as your freelancing continues to grow the tracking can prove to be a headache overtime.
Freelancers can lower their taxes up to a point. This is where a knowledge tax professional really earns their keep. Tax laws are steadfast; they move and change sometimes on an annual basis.
What may have been allowed in prior years may be null now and vice versa. But if speaking in generalizations, lowering your freelance taxes can happen in one of a few ways.
Filing freelance taxes involves several steps and should be done as early as possible to avoid any deadlines that could result in penalties. Beginning in January you will begin to receive 1099s from clients you’ve worked with over the previous year.
Depending on if you earned more than the allotted threshold, for example $600, you are required by law to report that as income as they are required to report that they paid you.
As we said before, keeping consistent records will be a huge plus come tax time. Even if you’re employing an accounting service or CPA, keeping your records in order will make the job of sorting through your finances that much easier in the short term and years down the road.
Swoop understands how difficult it can be to start, grow, and run a business effectively. We also understand the time commitment and cost associated regardless of how much experience you may have. Let us help you.
Book a call or visit our website to see what funding options are available to you as a freelancer. You may be eligible for multiple grants, loans, or financing options.
Written by
Ashlyn is a personal finance writer with experience in business and consumer taxes, retirement, and financial services to name a few. She has been published in USA Today, Kiplinger and Investopedia.
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At Swoop we want to make it easy for SMEs to understand the sometimes overwhelming world of business finance and insurance. Our goal is simple – to distill complex topics, unravel jargon, offer transparent and impartial information, and empower businesses to make smart financial decisions with confidence.
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