Income Taxes for Freelancers

As a freelancer, your tax situation changes a bit compared to if you were an employee. This means you need to take care of your own income taxes and make sure you have a system to deal with them. We’ll walk you through why your taxes are different as a freelancer and how you can make sure you’re square with the IRS.

Note: This is based on the US tax system. If you are a citizen of another country, your tax situation is probably different.

Why your taxes are different

The US tax system works on a pay as you go basis. As you earn money, you should be paying income tax on it. Then it gets settled at the end of the year. 

The amount you are taxed includes a few parts:

• Income Tax: Varies based on your income tax bracket
• FICA (funds Social Security and Medicare): 15.3%
  • From employee: Social Security Rate: 6.2% + Medicare Rate: 1.45% = Total: 7.65%
  • From employer: Social Security Rate: 6.2% +  Medicare Rate: 1.45% = Total: 7.65%

Some people do not pay at these rates or on the full amount of their earnings. Some people are also subject to other taxes, such as unemployment tax. Tax law is complex and different situations lead to different taxes.

As an employee, your employer usually handles sending in your taxes throughout the year. This is why some tax is withheld from your paycheck. In addition, your employer also pays part of your FICA tax. You pay 7.65%, and your employer pays 7.65% for the 15.3% total FICA tax due. Your employer takes both of these parts and sends them into the IRS on a set schedule.

Then, you get records of what you paid and settle up during tax time. 

As a freelancer, you don’t have the employer to send taxes in throughout the year. You are self employed. In addition, you are responsible for that entire 15% because you are both the employer and the employee in the tax situation. You need to pay on a quarterly basis and you need to keep records of how much you paid. Then, come tax time, you can settle it all. Just note, you can deduct your FICA taxes paid on your return.

What else is different?

Payment method – Because your taxes aren’t taken directly out of your paycheck, the way you pay will be different when paying taxes as a freelancer. You will need to create an account with the IRS and send either a check or electronic payment.

Amount you pay – The amount you pay will probably also change. You’ll need to pay that extra 7.5%. But, you may also be able to claim different deductions as well. 

When you pay – As an employee, your employer takes care of the payments throughout the year. You only need to worry about tax time in April. 

But your payment schedule will change as a freelancer. You’ll need to make estimated payments four times throughout the year. 

How to budget for taxes

As a freelancer, you don’t necessarily know how much you’ll earn throughout the year. This also means you don’t know exactly how much you’ll need to pay in income tax. Instead, you’ll estimate it and pay based on that estimate. 

There are a number of ways you can estimate your tax liability (how much you need to pay). But once you figure that out, you can start to budget for it.

Let’s say you expect to owe $2,400 to the IRS throughout the year. You also know you need to pay in four quarterly installments. During each quarter, you should be setting aside $600 that you can send in on the due dates. It’s usually easiest to set aside the same amount on a set schedule. So, you could set aside $100 twice a month (approximately every other week). This is my preferred method of budgeting for taxes. 

Another option is to budget a certain percentage of what you earn. A good number is about 30% (you might not have to pay it all, but at least you’ll have enough set aside.) Everytime money comes in, set aside 30% of that amount.

So where do you set this money aside? In a separate bank account. You should open a bank account that you only use for taxes, nothing else. Whenever those quarterly due dates roll around you’ll have the money ready.

How to pay taxes as a freelancer

You can pay your quarterly taxes by mail using a check or money order. You’ll need to use the estimated payments voucher or form 1040-ES.

In addition, you can pay online via bank account, credit card, or debit card. You can pay with either the IRS2Go App or their website: https://www.irs.gov/payments.

The IRS also has a number of other ways to pay your estimated taxes, including the Electronic Federal Tax Payment System. Check out the IRS website to find out which payment method is best for you.

What else you need to know

This is only a guide for federal income taxes. You may need to also pay quarterly taxes to your state and maybe local taxing authority too. Be sure to investigate those guidelines so you are well prepared to take care of all of your tax liability.

Just because you are paying taxes throughout the year doesn’t mean you can skip the annual April 15 tax deadline. You still need to file an annual tax return. This will allow you to figure out if you paid enough or too much tax throughout the year. 

Final thoughts

Planning for your taxes as a freelancer takes some work. But, once you figure out what you need to pay, when, and how, you’ll feel a lot better. Make sure you make a plan to pay your income tax for your freelance work. 

Photo by Iris Wang on Unsplash