A Simple Guide to Freelancer Taxes
Ask any freelancer their most dreaded business task - I bet it’s taxes.
When you are an employee working for someone else’s business, income taxes are not fun but they are much simpler. Your employer handles pretty much all of it - calculating your amount due, collecting it from your paychecks, and sending the cash off to the IRS. You really only deal with it come April tax return season.
Not so much as a freelancer or independent contractor.
In this Simple Guide to Freelancer Taxes, I’ll be showing what to do so that handling your income tax when you work for yourself isn’t a big, stressful mess.
Knowing Your Business
Independent contractors need to know a few things about the business they conduct in order to know how to plan and pay their taxes.
Your Income
As a freelancer, you should be tracking your income: where it’s coming from, how much it is, and what you’re doing with it. You probably have many different clients you are working with, making this even more complicated.
Some independent contractors do this with spreadsheets or *shudder* the Notes app. I do NOT recommend this. Get yourself a good bookkeeping system like QuickBooks Online where you can track your income and expenses all in one place. I’m a pro at this so reach out if you need some help in this area.
Business Structure
After knowing what your income looks like, the next thing to know is what your business structure is. Most freelancers, like graphics designers, are sole proprietors as it’s the most basic structure and the default in the U.S.
A sole proprietorship is defined as an unincorporated business owned by only one person (you). Examples of common sole proprietor businesses include designers, landscapers, catering companies, consultants, and house cleaners.
Tax Forms
The next step in our simple guide to freelancer taxes: tax forms. As the small business owner of a sole proprietorship like a graphic designer, there are a few tax forms you need to be in the know about.
Form 1099-NEC
This is the tax form your clients will send you after year end that will include all the income they paid you. 1099-NECs are due to independent contractors by January 31st of each year.
If your client paid you less than $600, they are NOT required to send you a 1099-NEC. This is why it’s important to do your own income tracking and not rely solely on these forms to figure out just how much you made this year.
Form 1040
This is your normal tax return form. Any income from regular employment goes on here, with self-employment income included in schedules within the form. We’ll talk about those next.
Schedule C
This is a part of the IRS Form 1040 where you will fill out any self-employment income you earned that year. Filling out this schedule will also calculate your total profit or loss for the year by subtracting your business expenses from your business income.
This schedule also includes any deductions you elect to take. Freelancers should absolutely be taking advantage of every deduction they can to reduce their tax liability. There are a ton out there, so be sure to consult your bookkeeper for help on which ones to take. Also, check out my other guides on How to Set Up a Home-Based Business and Optimizing the Travel Deduction.
Schedule SE
This is a part of the IRS Form 1040 where you will figure out how much tax you owe.
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How You are Taxed
I have some bad news for you. As an independent contractor, you are on the hook for two different kinds of taxes: self-employment (SE) taxes and income taxes. Unfortunately, paying both kinds is a requirement. So if you are a graphic designer or any other self-employed individual, this simple guide to freelancer taxes is here to help.
Self-Employment Tax
The SE tax is a tax levied on self-employed individuals. Whether your full time job is running your small business or being a freelancer is your side gig, you are responsible for paying SE taxes.
The SE tax rate is 15.3% of any income you make over $400. It’s made up of two parts:
Social Security (SS) is 12.4%
Medicare is 2.9%
SS and Medicare both have some specific caveats regarding how much in each type of tax you should pay.
SS has a cap on how much tax is levied based on income. Individuals whose total income (from employment, freelancing, or both) exceeds $147,000 for 2022: only that base $147k is applicable to the SS tax.
Medicare is the opposite. If your income is above the threshold for your filing status as an independent contractor, you are required to pay an extra 0.9% Medicare tax on that extra income. Here are the thresholds for 2022:
Married filing joint: $250,000
Married filing separate: $125,000
All others: $200,000
SE taxes are due quarterly. Here is my guide on why you should be paying your estimated taxes quarterly and how to calculate them.
Income Tax
This is just like the income tax you pay when you are an employee. This is your total taxable income less any deductions you take for the year. Federal income tax for individuals is due April 18th, 2023.
Need More Help?
This simple guide to freelancer taxes is meant to make your freelancer life a little easier. But I totally understand if you still have questions. I help independent contractors ease the pain points in their small biz business journeys - and that includes self-employment tax. Reach out today!
