How to Handle Taxes as a Freelancer

Once you become a freelancer, you have to worry about a few things you didn’t as an employee. One of the biggest things is your taxes. As an employee, your taxes are deducted right out of your paycheck. You just have to file a return at the end of the year in order to square up the difference. However, once you become a freelancer, these taxes aren’t automatically deducted. Suddenly, you have to pay them yourself. This is all because you are now considered to be self-employed.

When I first started freelancing, I was pretty confused about how it would all work out. Luckily, I had a family friend who was willing to sit down and explain everything to me. This allowed me to know that I was doing the right things and wouldn’t have the IRS sending me letters later on.

Please note this information is up-to-date as of August 2018. The IRS does change things every once in a while, so be sure to double check.

Why are my taxes different when I’m self-employed?

When you are employed, your employer withholds some tax out of your paycheck. Generally, this includes federal and state withholding and Medicare and Social Security (commonly referred to as FICA). In addition, your employer also pays some FICA tax for you as well.

When you become self-employed, none of these taxes are taken out of your paychecks anymore. Instead, you are responsible for paying them yourself.

You are still responsible for normal income tax, which is based on your income tax bracket. This is what you were paying through the federal and state withholdings.

However, you are now responsible for self-employment taxes as well. Self-employment taxes are your Medicare and Social Security taxes. However, you are now responsible for paying for both the employee and employer portions. As a result, you will be paying a little bit extra. So, instead of paying 7.65% and your employer paying another 7.65%, you are now paying 15.3%.

How do I know if I have to pay self-employment taxes?

Paying self-employment taxes is based on an income threshold. As soon as you meet this requirement, you need to prepare to pay SE taxes.
The most common requirement is if you make at least $400 from self-employment activities. So, if within the calendar year, you make $400 from freelancing, your own business, or the gig economy (among other things), you’ll need to pay self-employment taxes on your income from self-employment.

Note: if you make less than $400, but still meet other requirements, you may also need to pay these taxes. However, this situation isn’t as common. Another trigger is if you make at least $108.28 from church employee income.

When are taxes due?

The schedule for paying your taxes also changes a little bit as a freelancer. Since, your taxes aren’t being withheld from your paycheck each pay period, the government still wants to make sure you’re going to pay it throughout the year. This means you’ll have to make quarterly payments instead. This allows you to pay a little bit in at a time, just as you would as an employee and square up during the traditional tax season.

The way quarterly taxes are calculated is a little bit different. They are estimated. Essentially, you make an educated estimate about how much you will earn during the year and calculate your quarterly tax bill based on this. You then fill out form 1040-ES and send in your estimate. If you expect to pay in at least $1,000 in taxes, you’ll need to do quarterly taxes. (Essentially, if freelancing is a decent part of your income, you should be doing it.)

If it’s your first year in business, you can take a logical guess. It might be hard to know what you’ll be able to bring in, but if you try to estimate appropriately, you’ll be fine.

The following April, you’ll still have to file a traditional tax return. You’ll now have to include a Schedule C or C-EZ and Schedule SE though, in order to account for your self-employment earnings. These will allow you to take into account your unique situation. In addition, you’ll be able to report the amount of estimated taxes you already paid in through the quarterly payment. This will allow you to figure out how much you’ll owe or get back when you file in April.

What if I am also employed somewhere else?

If you are also employed somewhere else, you’ll have some options. Your employer will still withhold taxes from your paycheck. You can alter how much of your paycheck is withheld in order to make it come out more even at tax time. I recommend using the IRS’s withholding calculator to find out what you should claim.

For a while, I was still employed at my old job while I started freelancing. Using the IRS’s calculator, I was able to make an estimate of what my withholding allowance should be taking both my employment and self-employment income into consideration. This allowed me to create a more even result when tax time came.

If you are married, filing jointly, you may also want to look into the withholding calculator. If between you and your spouse you have both self-employment and traditional earnings, you can adjust your withholding in a similar way.

What kind of documents should I keep?

When you’re an employee, you don’t have to keep quite as much paperwork for taxes as when you’re self-employed. However, if you know what to keep and create an organization system, you’ll be well prepared to handle your taxes.

You should keep basically every receipt related to your self-employment. If you buy supplies, products, or services related to your business, there may be an option for you to deduct it from your taxes. Having the receipts on file will allow you to prove your expenses should you ever need to.

I prefer to use bookkeeping software to keep track of my income and expenses. I use a free service called Wave (you pay if you use certain add on services, such as credit card processing). This allows me to have all of my records in one well organized, accessible place. I can even keep copies of receipts in the program. This allows me to quickly find what I need when preparing my tax documents.

What about state and local taxes?

Your federal taxes are not the only ones that are affected by self-employment income. As a freelancer, you’ll also need to file state and local taxes. Your state and municipality may require additional documentation, similar to the Schedule C. Watch out though, the rules for deductions are usually a bit different than they are at the federal level. If you have questions, your state government or a trusted tax professional can be a huge help.

How can I make paying taxes easier?

Keeping track of all of these new freelancing tax rules may seem difficult. However, if you stay organized an plan ahead, it’ll become easier.
One of the best things you can do is open a separate bank account for your freelancing/self-employment work. This will allow you to separate out your income and expenses in a way that will make sifting through everything a ton easier. You’ll know that everything having to do with your business is right there.

In addition, you should hold back 20-30% of your income for taxes. How much you end up actually paying will depend on a lot of factors. You’ll eventually figure out if it should be closer to 20% or 30%. However, having the money set aside will ensure that when you go to pay your quarterly and annual tax bills, you’re not floundering to find the money. If you end up with any left over, great; at least it was there. I find it best to set this tax money aside in another separate account so you don’t have to remember to subtract it out of your working capital every time.

Finally, be very organized about everything. Make sure you track every income and expenditure remotely related to your business. It’ll make it easier to decide later on what is actually related if you at least have the documentation ready.

Taxes as a freelancer can be a bit confusing if you’ve never dealt with them before. However, with a little bit of planning and preparation, you’ll be able to handle them like a pro in no time.

Do you have any additional questions about freelance taxes? If so, ask us in the comments or on Twitter. You can also find us on Pinterest and Instagram for more helpful information.