Step-by-Step Guide to Filing Taxes as a Freelancer | Best Guide 2024 Edition

Last updated on September 4th, 2024 at 09:48 am

Alright, imagine you’ve just joined the freelance circus. You’re the star performer—whether you’re juggling words as a writer, acrobatics as a designer, or spinning code like a coding magician. The only problem? The circus has a tricky new rule: you have to manage your own taxes now.

Learn More About: High-Yield Savings Accounts with No Fees: Growing Your Money Without the Hassle

Here’s How to Tackle Freelance Taxes Without Losing Your Mind:

Track Your Earnings and Expenses:

Circus Analogy: Picture your freelance work as a big top tent with lots of different acts. Every time you make money (a ticket sale), or spend money (buying new juggling balls), you need to keep track of it all. If you don’t, your accountant (or circus ringmaster) might start juggling flaming torches just to make sense of it.

Set Aside Money for Taxes:

Circus Analogy: Imagine you’re a trapeze artist who needs to save up for a safety net. For every show (payment), put aside a portion of your earnings into a “tax safety net” so you don’t fall flat when tax time comes. Otherwise, you might find yourself in a sticky situation, scrambling to find money you didn’t save.

Understand Deductions:

Circus Analogy: Think of deductions as magical tools that make your act smoother. Whether it’s your costume (software), or those fancy new juggling pins (office supplies), these are things that can lower your taxable income. Keep a list of all your props and tricks to maximize your deductions.

Quarterly Estimated Taxes:

Circus Analogy: If your circus has shows every few months, you don’t wait until the end of the year to settle up with the ticket collector. Instead, you pay a little bit regularly. For freelancers, this means paying estimated taxes quarterly so you don’t get hit with a big tax bill all at once.

Hire a Tax Professional:

Circus Analogy: Sometimes, even the best trapeze artists need a spotter. If the tax tightrope seems too tricky, consider hiring a tax pro to guide you through the high-flying maneuvers and ensure you don’t stumble.

With these tips, handling your taxes as a freelancer doesn’t have to feel like performing in a three-ring circus. Keep track of your earnings, save for taxes, use your deductions wisely, pay estimated taxes, and get professional help if needed. Before you know it, you’ll be navigating the tax tightrope with the grace of a seasoned performer. 🎪✨

In this guide, we’re going to walk you through everything you need to know about filing taxes as a freelancer. From understanding your tax obligations to keeping records, and even some tips on how to reduce your tax bill, we’ve got you covered

Understanding Your Tax Obligations as a Freelancer

Before we dive into the nitty-gritty of filing your taxes, let’s start with the basics. When you’re a freelancer, you’re considered self-employed, which means you’re responsible for paying taxes that would otherwise be handled by your employer. These include:

Income Tax: Just like everyone else, you need to pay federal, state, and sometimes local income taxes on the money you earn. However, as a freelancer, you don’t have an employer withholding these taxes from your paycheck throughout the year, so you need to plan ahead.

Self-Employment Tax: This is the big one. Self-employment tax covers Social Security and Medicare taxes that your employer would typically handle if you were a W-2 employee. The self-employment tax rate is 15.3% on your net earnings (12.4% for Social Security and 2.9% for Medicare).

Estimated Quarterly Taxes: Because you don’t have taxes withheld from your freelance income, the IRS expects you to pay estimated taxes quarterly. These payments help cover your income tax and self-employment tax.

State and Local Taxes: Depending on where you live, you may also be required to pay state and local income taxes. Each state is different, so be sure to check your state’s requirements.

Step 1: Organize Your Income and Expenses

The first step in filing your taxes as a freelancer is to get organized. This might sound boring, but trust me, it’s crucial. Here’s what you need to do:

Track Your Income

As a freelancer, you’re responsible for tracking every penny you earn. This includes payments from clients, side gigs, and even those odd jobs you pick up here and there. You can use tools like QuickBooks, FreshBooks, or even a simple Excel spreadsheet to keep track of your income. Make sure you save all invoices and payment receipts—they’re your proof of income.

Keep Track of Your Expenses

One of the perks of being a freelancer is that you can deduct business expenses to reduce your taxable income. But to do that, you need to keep track of all your expenses throughout the year. This includes things like:

Office supplies (paper, pens, etc.)

Software and subscriptions (like Adobe Creative Cloud, web hosting)

Marketing and advertising costs

Travel expenses (if it’s for business)

Home office expenses (more on that later)

Use the same tool you’re using to track income, or a separate one, to keep a record of your expenses. The key is to stay consistent and keep everything in one place.

Set Up a Separate Bank Account

To make tracking your income and expenses easier, consider setting up a separate bank account for your freelance business. This way, all your business-related transactions are in one place, making it easier to manage when tax time rolls around.

Step 2: Understand Your Deductions

Deductions are your best friend as a freelancer. The more deductions you can claim, the less taxable income you’ll have, which means a lower tax bill. Here are some common deductions freelancers should be aware of:

Home Office Deduction

If you work from home, you can claim a home office deduction. This deduction allows you to deduct a portion of your rent or mortgage, utilities, and other home-related expenses. To qualify, your home office must be used exclusively and regularly for business purposes. The IRS offers two methods for calculating the home office deduction:

Simplified Method: You can deduct $5 per square foot of your home office, up to 300 square feet (maximum deduction of $1,500).

Actual Expense Method: This method involves calculating the actual expenses of your home office, including a percentage of your rent/mortgage, utilities, and repairs. It can be more complex, but it might result in a larger deduction.

Business Supplies and Equipment

You can deduct the cost of any supplies and equipment you use for your freelance business. This includes computers, software, office furniture, and even things like pens and paper. Keep all your receipts, as you’ll need them to claim these deductions.

Internet and Phone Bills

If you use your internet and phone for business purposes, you can deduct a portion of these expenses. If you have a dedicated business line, you can deduct the full cost. Otherwise, you’ll need to calculate the percentage of time you use your internet and phone for business versus personal use.

Health Insurance Premiums

As a self-employed individual, you can deduct the cost of your health insurance premiums. This includes premiums for yourself, your spouse, and your dependents. It’s a valuable deduction, especially if you’re paying for insurance out of pocket.

Retirement Contributions

One of the perks of being self-employed is that you have more retirement savings options. Contributions to a SEP IRA, Solo 401(k), or SIMPLE IRA are all tax-deductible. Not only do these contributions reduce your taxable income, but they also help you save for the future.

Travel and Meals

If you travel for business or meet with clients, you can deduct your travel expenses, including airfare, lodging, and meals. Keep detailed records of your trips, including receipts and the purpose of the trip. Note that only 50% of meal expenses are deductible.

Continuing Education

If you take courses or attend workshops to improve your skills and grow your business, these expenses are deductible. Whether it’s an online course or a conference, as long as it’s related to your business, you can claim it as a deduction.

Step 3: Calculate Your Self-Employment Tax

Remember that self-employment tax we talked about earlier? It’s time to calculate it. Here’s how:

Calculate Your Net Earnings: Your net earnings are your total income minus your business expenses and deductions. This is the amount you’ll be taxed on.

Apply the Self-Employment Tax Rate: Multiply your net earnings by 15.3% to calculate your self-employment tax. For example, if your net earnings are $50,000, your self-employment tax would be $7,650.

Take the Self-Employment Tax Deduction: The good news is that you can deduct half of your self-employment tax when calculating your income tax. In the example above, you would deduct $3,825 from your taxable income.

Step 4: Pay Estimated Quarterly Taxes

One of the biggest adjustments for new freelancers is getting used to paying estimated taxes quarterly. The IRS requires you to make these payments if you expect to owe $1,000 or more in taxes for the year. Here’s how to handle it:

Calculate Your Estimated Taxes

To calculate your estimated taxes, start with your expected income for the year. Subtract your deductions and multiply the result by your tax rate (including self-employment tax). Divide this number by four to determine your quarterly payment.

For example, if you expect to earn $60,000 in freelance income and have $10,000 in deductions, your taxable income would be $50,000. If your combined federal and self-employment tax rate is 25%, you would owe $12,500 in taxes for the year. Your quarterly payments would be $3,125.

Pay Your Estimated Taxes

You can pay your estimated taxes online using the IRS’s Electronic Federal Tax Payment System (EFTPS), or by mailing in Form 1040-ES with your payment. Payments are due on the following dates:

April 15

June 15

September 15

January 15 (of the following year)

If you don’t pay enough in estimated taxes throughout the year, you may be hit with a penalty at tax time. So, it’s important to stay on top of these payments.

Step 5: Gather Your Tax Forms

When tax season rolls around, you’ll need to gather all the necessary tax forms to file your return. Here’s what you should be on the lookout for:

Form 1099-NEC

As a freelancer, you’ll receive Form 1099-NEC from any client who paid you $600 or more during the year. This form reports the income you earned from that client. If you worked with multiple clients, you’ll receive a 1099-NEC from each one. Keep in mind that you’re required to report all your income, even if you don’t receive a 1099-NEC for it.

Form 1040

This is the main tax form you’ll use to file your return. As a self-employed individual, you’ll also need to attach Schedule C (Profit or Loss from Business) and Schedule SE (Self-Employment Tax) to your Form 1040.

Schedule C

Schedule C is where you’ll report your income and expenses from your freelance business. This is where all that record-keeping comes in handy. You’ll list your income at the top, and then subtract your expenses to calculate your net profit or loss. If you had a profitable year, your net profit will be added to your total income on Form 1040. If you had a loss, you can use that loss to offset other income, potentially lowering your overall tax bill.

Schedule SE

Schedule SE is where you calculate your self-employment tax. You’ll use the net profit from Schedule C as the starting point and then follow the instructions on the form to determine your self-employment tax liability. Remember, you can deduct half of this tax on your Form 1040, which helps reduce your taxable income.

Form 8829

If you’re claiming a home office deduction using the actual expense method, you’ll need to fill out Form 8829 (Expenses for Business Use of Your Home). This form helps you calculate the percentage of your home that’s used for business and the associated expenses you can deduct.

Form 4562

If you purchased significant business assets like equipment or furniture, you might need to fill out Form 4562 (Depreciation and Amortization). This form allows you to deduct the cost of these assets over time rather than all at once, which can provide tax benefits over several years.

Step 6: File Your Taxes

Now that you’ve gathered all your forms and calculated your taxes, it’s time to file your return. Here are your options:

File Online

The easiest and most convenient way to file your taxes is online. There are plenty of tax software options available, like TurboTax, H&R Block, and TaxAct, that walk you through the process step by step. Many of these services offer versions specifically tailored to self-employed individuals, making it easier to claim deductions and handle your self-employment tax.

Hire a Tax Professional

If your freelance business is more complex or you’re unsure about handling your taxes on your own, consider hiring a tax professional. An accountant or tax preparer can help ensure you’re taking advantage of all available deductions and credits, and they can also help you navigate any tricky tax situations. Yes, it’s an added expense, but it can be worth it for the peace of mind and potential tax savings.

Paper Filing

While less common these days, you can still file your taxes the old-fashioned way—on paper. If you choose this route, you’ll need to fill out all the necessary forms by hand and mail them to the IRS. Just make sure you double-check everything before sending it off, as mistakes can lead to delays or additional taxes owed.

Step 7: Plan for Next Year

Congratulations! You’ve successfully filed your taxes as a freelancer. But before you celebrate too much, it’s important to start planning for next year. Taxes as a freelancer can be unpredictable, and it’s easy to fall behind if you’re not prepared.

Review This Year’s Tax Return

Take a look at your tax return and see where you could improve for next year. Did you have a big tax bill because you didn’t pay enough in estimated taxes? Were there deductions you missed out on? Use this information to make adjustments for the upcoming year.

Set Aside Money for Taxes

One of the best ways to avoid tax-time stress is to set aside money throughout the year to cover your tax bill. A good rule of thumb is to set aside 25-30% of your income for taxes. You can keep this money in a separate savings account so you’re not tempted to spend it.

Stay Organised

Make a commitment to stay organized throughout the year. Keep track of your income and expenses, save your receipts, and update your records regularly. This will make tax time much easier and help you avoid last-minute scrambling.

Consider a Retirement Plan

If you haven’t already, consider setting up a retirement plan for your freelance business. Contributions to a SEP IRA, Solo 401(k), or SIMPLE IRA are not only tax-deductible, but they also help you build a nest egg for the future. Plus, the earlier you start saving for retirement, the more time your money has to grow.

Keep Up with Tax Law Changes

Tax laws are always changing, and it’s important to stay informed about any updates that might affect your freelance business. Follow tax news, subscribe to newsletters, or consult with a tax professional to make sure you’re aware of any new rules or deductions.

Tips for Reducing Your Tax Bill

Now that you’ve got the basics down, here are a few extra tips to help you reduce your tax bill as a freelancer:

Take Advantage of the Qualified Business Income Deduction

The Qualified Business Income (QBI) deduction allows eligible self-employed individuals to deduct up to 20% of their qualified business income. This deduction can significantly reduce your taxable income, so be sure to check if you qualify.

Consider Incorporating Your Business

If your freelance business is growing, you might want to consider incorporating as an S-Corporation or LLC. This can provide tax benefits, such as the ability to pay yourself a salary and reduce your self-employment tax liability. However, there are additional costs and paperwork involved, so weigh the pros and cons carefully.

Keep Track of Mileage

If you drive for business purposes, you can deduct your mileage on your tax return. The IRS sets a standard mileage rate each year (e.g., 56 cents per mile in 2024), and you can use this rate to calculate your deduction. Be sure to keep a log of your business trips, including the date, purpose, and miles driven.

Maximise Retirement Contributions

Maxing out your retirement contributions is one of the best ways to reduce your taxable income. Contributions to a SEP IRA, Solo 401(k), or SIMPLE IRA are tax-deductible, and they also help you save for the future. If you have extra income at the end of the year, consider making additional contributions to your retirement account.

Invest in Your Business

If you’re looking to reduce your tax bill, consider reinvesting some of your income back into your business. Upgrading your equipment, purchasing new software, or taking a course to improve your skills can all be deducted as business expenses, and they can help your business grow.

Don’t Overlook Small Deductions

Small deductions can add up quickly, so don’t overlook them. Whether it’s a $20 subscription to a business magazine or a $50 networking event, these expenses can help reduce your taxable income. Keep detailed records of all your business-related expenses, no matter how small.

The Bottom Line: Filing Taxes as a Freelancer Doesn’t Have to Be Stressful

Filing taxes as a freelancer might seem daunting at first, but with a little bit of preparation and organization, you can handle it like a pro. The key is to stay on top of your income and expenses throughout the year, take advantage of all available deductions, and pay your estimated taxes on time.

By following the steps outlined in this guide, you’ll not only make tax time less stressful, but you’ll also maximize your deductions and potentially reduce your tax bill. And remember, if you’re ever unsure about something, don’t hesitate to consult with a tax professional. It’s better to ask for help than to make a costly mistake.

So, take a deep breath, get organized, and tackle those freelance taxes with confidence. You’ve got this!

Learn More About: