Taxes for Freelancers: What the Self-Employed Need to Know

Working for yourself feels exhilarating. You’re your boss. You can work wherever (and whenever) you want. The downside to your independence? Freelance taxes. 

Freelancers and independent contractors enjoy autonomy and the added responsibility of self-employment tax rules. Unlike employees who earn a paycheck, freelancers must calculate and pay quarterly taxes.

The income tax filing process differs for self-employed individuals as compared to traditional employees. Freelancers must follow complicated rules and often file additional forms. 

This article explains what freelancers should know about filing taxes. 

Paying Taxes as a Freelancer

What do freelancers need to know about income tax? You can prepare for a successful tax season in just a few steps. 

Step 1: Learn About Freelance Tax Laws

Freelancers and independent contractors should have a general grasp of freelance tax laws. We’ll cover some basics in this article. 

You can find numerous resources at the Internal Revenue Service (IRS) small business and self-employed tax center, which provides information for all business types. 

Also, the 1-800Accountant blog supports small business owners by explaining complicated tax topics.

Step 2: Understand Your Business Structure

Tax forms and rates depend on your business entity type. Your business defaults to a sole proprietorship unless you establish a legal entity for your freelance work.

Other common legal entity types include the following:

• Limited Liability Company (LLC):
  • Single-member LLCs owned by individuals default to sole proprietorships. 
  • LLCs can elect to be treated as partnerships or C corps for income tax purposes.

• C corporation

• S corporation

• Partnership

Each business structure should follow relevant tax rules. We recommend consulting tax professionals to determine the right entity type for your freelance business. 

Step 3: Find Your Tax Forms

After identifying your business structure, determine which federal tax forms you should file. 

Sole proprietorships and single-member LLCs should attach Schedule C to their IRS Form 1040, Individual Income Tax Return. For quarterly estimates, use IRS Form 1040-ES, Estimated Tax for Individuals.

All other entities should file a business return separate from the owner’s tax form. C corps, S corps, and partnerships should use one of the following forms:

• Form 1120: C corporations and LLCs taxed as C corps

• Form 1120-S: S corporations

• Form 1065: Partnerships and LLCs taxed as partnerships

Step 4: Determine Deadlines for Returns and Quarterly Estimates

Refer to the following due dates and note the filing deadlines for returns and estimates. Block some time on your calendar to gather information and file timely. 

Annual tax return filing deadlines:

• March 15th: Form 1120-S and Form 1065
  
• April 15th: Form 1040 and Form 1120 

Need more time to file your return? You can submit a 6-month extension. Be sure to pay what you think you’ll owe, or you could face penalties for failure to pay timely.

If you follow a fiscal tax year, different dates may apply. Check with a tax professional to find the right due dates for your business.

All businesses and business owners who plan to have income should make quarterly estimated tax payments every three months. Quarterly payments are due by April 15th, June 15th, September 15th, and December 15th. 

Step 5: Learn How to Calculate Your Tax Liability

Generally, your tax liability calculation requires two steps. 

1. Calculate your business taxable income. Total your freelance income, then subtract your business tax deductions.
   
2. Calculate your business tax liability. Multiply your taxable income by your income tax rate. Add self-employment tax to find your total tax liability.

You should follow this approach for your quarterly estimates and your business tax return. Remember, when preparing your estimated taxes, you should forecast your income for the remainder of the tax year.

If tax calculations seem overwhelming, don’t worry. 1-800Accountant’s self-employment tax professionals can help you calculate and file your taxes. We’ll help you track deadlines and payments so you can get back to your business. 

Step 6: Understand State Tax Rules

Depending on your business location, your state could impose different deadlines. State tax rates and forms vary. Be sure to note your state and local tax requirements. 

Look for state tax resources on your Department of Revenue or Secretary of Treasury website. 

Step 7: Gather Your Business Information

Freelancers and independent contractors receive income from multiple sources – bank account transfer, electronic payment, or paper checks – all requiring diligent tracking. 

US businesses must submit IRS Form 1099-NEC to report payments to freelancers and independent contractors. (Before 2020, the IRS required 1099-MISC for independent contractor payments.) You should receive a Form 1099-NEC from US corporations and partnerships.

However, individuals and non-US businesses might not send you documentation. You should keep track of all payment sources and methods during the year. 

To determine your business income and expenses, gather the following records: 

• IRS Forms 1099-NEC

• Bank statements and savings account records

• Online payment accounts, such as PayPal

Consider using outsourced accounting services or tax software. CPAs and tax professionals can help you track income throughout the year and avoid unpleasant surprises at year-end.

How Do You Report Freelance Income?

IRS Form 1040 Schedule C

Sole proprietors and single-member LLCs should report their business income and tax deductions on IRS Form 1040 Schedule C, Profit or Loss from Business. (Refer to Step 3 above if you run a corporation or partnership.)

Review the Schedule C instructions to prepare the form. Enter your business information, then report your earnings and expenses on the relevant lines. Total your income and subtract deductions to compute your net profit or loss from your freelance business. 

Report the total profit or loss on your Form 1040. If your net profit is at least $400, you should also complete Schedule SE. 

IRS Form 1040 Schedule SE

Form 1040 Schedule SE, Self-Employment Tax, calculates the tax you owe on your self-employment income. 

Freelancers with at least $400 net profit on Schedule C should complete Schedule SE. Report your self-employment tax on Form 1040.

IRS Forms 1120, 1120-S, and 1065

Corporate and partnership freelance businesses should report their income on business tax returns instead of Form 1040 Schedule C. 

We recommend partnering with self-employment tax professionals for calculating and filing your business taxes. 

How Much Do Freelancers Pay in Taxes?

Freelancers and independent contractors must pay both income tax and self-employment tax. 

The IRS updates individual income tax brackets annually. The following table reflects the 2023 individual income tax brackets by filing status. For example, single filers who earn $44,725 - $95,375 have a 22% income tax rate in 2023.

2023 Federal Income Tax Rates by Filing Status

Tax Rate

Single

Head of Household

Married Filing Jointly

10%

$0 - $11,000

$0 - $15,700

$0 - $22,000

12%

$11,000 - $44,725

$15,700 - $59,850

$22,000 - $89,450

22%

$44,725 - $95,375

$59,850 - $95,350

$89,450 - $190,750

24%

$95,375 - $182,100

$95,350 - $182,100

$190,750 - $364,200

32%

$182,100 - $231,250

$182,100 - $231,250

$364,200 - $462,500

35%

$231,250 - $578,125

$231,250 - $578,100

$462,500 - $693,750

37%

$578,125+

$578,100+

$693,750+

C corporations pay 21% income tax in 2023. 

Remember, many states and cities impose income taxes. Check your local tax rules to stay compliant. 

What Is Self-Employment Tax?

In addition to income tax, freelancers pay self-employment tax of 15.3% (regardless of their income tax bracket). Self-employment tax represents 12.4% of Social Security and 2.9% of Medicare taxes. 

Why do freelancers pay self-employment tax?

Consider a traditional employee who receives a bi-weekly paycheck: The employer withholds Social Security (6.2%) and Medicare (1.45%) taxes from the employee each pay cycle. The employer pays an equal portion. In total, the employee and employer split the 15.3% of Social Security and Medicare taxes on the employee’s wages.

In contrast, self-employed individuals must pay both the employer’s and the employee’s share of Medicare and Social Security taxes. 

Fortunately, freelancers can take business expense deductions, which helps reduce taxable self-employment income. 

What Tax Deductions Can Freelancers Take?

Think through your business-related spending. Many of your business expenses qualify as tax deductions, which reduce your taxable income. 

How do you know if you can deduct an expense? Qualified business tax deductions are ordinary (i.e., not excessive) and necessary for running the business. 

Common business tax deductions include the following: 

• Advertising

• Business equipment and supplies

• Depreciation

• Home office deduction

• Legal fees

• Training and education

• Travel and business meals

Track your spending throughout the year by monitoring your bank statements and credit card bills. Maximize your deductions to reduce your taxable income and your tax bill. 

How Do I Find out If I Need to Pay Quarterly Taxes?

Generally, you should make quarterly estimated tax payments if you expect to have freelance income. 

The IRS expects businesses to pay taxes as they earn income. Since full-time freelancers and independent contractors do not receive paychecks (and do not have taxes withheld each pay cycle), they should make quarterly tax payments. 

The IRS imposes penalties and interest for failure to pay your taxes timely. We recommend monitoring your receipts and expenses throughout the year to avoid surprises. 

Simplify Your Freelance Tax Preparation

Taxes are complex. We understand self-employment taxes can feel like the least of your concerns when you have a business to run. 

1-800Accountant’s accounting and tax professionals can support all your self-employment and income tax needs. We’ll help you monitor your income and maximize your deductions. 

Don’t risk forgetting to file. Schedule a free call for personalized assistance with tax preparation for freelancers & self-employed entrepreneurs.