Freelancer Tax Guide
What freelancers need to know about filing taxes.
Here at TrovaTrip, we love our Hosts. They are talented, charismatic and take Travelers on adventures all over the world. Many of our Hosts totally rock the digital nomad lifestyle and thrive as freelancers. We know that one of the trickiest tasks for freelancers is taxes. So Hosts, this one’s for you – use this guide to help you through the complicated be-your-own-boss tax process.
Employees vs. freelancers
Taxes are very different for freelancers than they are for employees. As a freelancer, you need to know what steps to take when preparing your taxes. Please note that these tips should not replace legal advice. Talk to a tax expert or lawyer if you have further questions. There’s no shame in consulting a professional. In fact, we encourage it.
Employees don’t need to worry too much about taxes. Their employers calculate the amount withheld from paychecks, and those funds go directly to the IRS and state tax department. All employees have to worry about is filing a tax return by April 15.
Self-employed freelancers are different. No one takes care of the taxes for you. You’re required to pay taxes directly to the IRS and state periodically. And you have to figure out how much you owe and file your annual tax return all on your own.
Filing your taxes as a freelancer can be tricky because you aren’t just submitting a W-2. You have to report all your freelance income and claim deductions. But this should make you feel better: Because of all the freelance tax deductions you can take, you’ll often pay less than a regular employee who makes the same amount as you. That’s a win, right?
Next, let’s talk about federal, state and local taxes. We’ll break them down for you by type of tax in this freelancer tax guide.
These are usually the hardest to do. You pay personal income tax on your freelance business’s profits. You need to file an annual income tax return with the IRS by April 15 each year. It should include your income and deductions from the year before, as well as the estimated tax you paid along the way (we’ll explain that in a minute).
If you’re a self-employed freelancer, you can get Social Security and Medicare benefits when you retire. But that means you have to pay these self-employment taxes along the way to help fund these programs. You’re required to pay these if your net yearly earnings are $400 or more.
You’ll file an annual state income tax return with your state tax department. You can find your state’s tax agency on the IRS website. Each state (except Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming) have their own income taxes, forms and procedures for freelancers. In most states you pay your state income taxes throughout the year in the form of estimated taxes, which most freelancers pay at the same time as their federal estimated taxes. The IRS has a great Interactive Tax Assistant that can also help with questions.
If you set up an LLC for your freelance business, you may have to pay additional taxes depending on where you live. Check with your state’s tax agency to see if this applies to you.
You may have to pay local taxes as freelancer taxes vary by state. Check your local government’s website or talk to your local chamber of commerce to find out if you need to pay local taxes.
Filing your taxes
You’ll most likely file your taxes as a sole proprietor. Report earned income or losses on your personal tax return (IRS Form 1040). If you earn a profit, add that money to other income you’ve earned, including savings accounts and spouse’s income if you’re married and filing jointly. That total amount will be taxed. Keep in mind you can deduct business-related expenses, including office rent, mileage, equipment and more.
Rules are different if you want to be taxed as an LLC or corporation. Check with your tax professional if you want to go that route.
Freelancer Taxes 101.
Here are two things you should make sure you know before you file your taxes. These are insider tips, so grab a pen!
1. Pay estimated taxes along the way.
Unlike when an employer withholds taxes from an employee's paycheck and sends it to the IRS, you are responsible for all this as a self-employed freelancer.
Technically freelancers aren’t supposed to wait till April 15 to pay taxes in a big lump sum. Instead, you should make four quarterly tax payments (those estimated taxes we mentioned earlier) throughout the year. You must pay these taxes if you expect to owe more than $1,000 in federal tax during the year. If you underpay these estimated taxes, the IRS will penalize you, so be careful.
Here’s an important tip: To make sure you have enough money to pay your estimated taxes, set aside some money from each paycheck you can use to cover your income taxes, Social Security and Medicare taxes. You could even set up a bank account solely for this purpose. The amount you deposit will essentially depend on your income, federal and state income tax brackets and tax deductions. Typically you’ll want to deposit 25% to 50% of your paycheck.
2. Keep adequate records throughout the year.
Without proper records of income and expenses, it will be difficult to prepare your tax returns. And if you’re ever audited by the IRS, you could end up losing your deductions if you don’t have proper records. This could be an expensive mistake. Thanks, but no thanks.
This may sound difficult, but try to keep a record of every cent spent on your business and every cent you make. Yep, every cent. Definitely keep receipts of any expenses greater than $75. You might also want to invest in accounting software like QuickBooks Online that can help you keep proper records.
You can do this!
We get it – taxes can be tough, especially for self-employed freelancers. All it takes is a little preparation and knowing what forms to use and you’ll be in good shape when tax time rolls around. When in doubt consult a tax professional. But hopefully they can make the tax process easier when April approaches. Good luck! You got this.
- IRS Self Employed Individuals Tax Center
- Collective Ultimate Guide to Freelance Taxes
- The Balance - How to File Self-employment Taxes
- How to Budget Taxes as a Freelancer
- IRS Form 1040
- The Basics of Bookkeeping
Disclaimer: The tips in this article are not meant to replace legal advice. Please consult a tax professional for legal advice.