If you’re worried about paying taxes as a freelancer, you’re not alone. But the good news is that you can overcome every problem you can think of—the real and imagined ones. So don’t worry about the “what ifs” and worst-case scenarios. Instead, start digging into the reality of what you’re facing.
And if you’re an established freelancer, this is an excellent time to make sure you’re following best practices. Work with a tax professional, and at the same time, understand exactly where your money is going and why.
Ready to put on your CEO hat? Let’s dig in and explore the world of taxes!
Reporting Your Income
Have you heard the myth that you don’t have to pay taxes if you earn less than $600 from a client?
That is entirely false!
The $600 myth is based on the fact that your client is only required to send you a 1099-MISC form if they pay you $600 or more. (In which case, they may ask you to fill out a W-9.) However, not all clients who should send you a 1099 will actually do so. Regardless, it is always your responsibility to track your freelance income and pay your taxes accordingly.
Here are some hypothetical numbers:
- Client A pays you $200 for a project
- Client B pays you $500 for a project
Neither client owes you a 1099-MISC. And yet, you still need to report your earnings to the IRS.
It’s best to be on the right side of the law here. If you get audited and haven’t included income from Clients A and B, you’ll get hit with interest and penalties from the IRS.
As long as your freelance business nets $400 in a given year, you are obligated to file taxes for self-employment income.
Quarterly Taxes: The Calculations
When you start to pay taxes as a freelancer, make sure you pay estimated tax payments quarterly. As long as you earn more than $1,000 for the year, you’re required to make these quarterly payments toward your future tax bill.
If you’re new to freelancing, this might come as a surprise. But think about it: when you’re an employee, taxes are withheld from each of your paychecks. Your employer makes sure you’re paying your Social Security and Medicare taxes. (You may see this listed as FICA—Federal Insurance Contributions Act—on your paystub.)
We freelancers owe self-employment tax in place of money normally withheld from a W-2 paycheck.
As freelancers, we’re both the employer and the employee. Which means we pay both halves of the tax owed.
If you think this sounds like a raw deal, don’t worry! Freelancers have many opportunities to reduce the amount of taxable income in the first place. (We’ll get to that in a sec.)
The IRS says we can pay all of our estimated payments at the beginning of the year. But the quarterly option makes the task much easier. (Unless you want to pay thousands of dollars upfront!)
(And, of course, a tax professional can also help you!)
The math can be a bit funky (especially your first year), but as long as you make some payments, you’ll avoid penalties—and a giant bill—at the end of the year.
How to Pay Taxes as a Freelancer
Make sure you follow the unique schedule the IRS has for quarterly taxes. For example, Q1 goes from January 1-March 31, and your payment is due on April 15.
We recommend that you set reminders a few weeks before each due date to make sure you’re prepared when the day rolls around.
Here are the three ways you can actually make the payment:
- By check (the IRS may send you pay slips and envelopes once they have you in the system)
- Directly from your bank account
- With a debit or credit card (there is a small fee for this option)
Preparing for Tax Payments
Another good rule of thumb is to set aside money in a separate account to make your quarterly tax payments. There’s nothing worse than getting a $5,000 payment from a client, spending it all, and forgetting that you need to pay taxes out of it!
Many people ask us how much to set aside. Again, we’re not tax professionals, so talk to someone who can give you advice specific to your situation. We reserve at least 25% for our tax bill.
These are estimated taxes, so don’t worry too much if you don’t pay the exact amount due. Just do your best and keep good records of your income and expenses. You may face a penalty if you underpay, which (according to the IRS) will be waived if you meet one of these criteria:
- You owe less than $1,000 in tax after subtracting your withholding and refundable credits.
- You paid withholding and estimated tax of at least 90% of the tax for the current year or 100% of the tax shown on the return for the prior year, whichever is smaller.
If you start earning more than expected as the year goes on, you can make up those payments. As long as you pay at least 90% of what you owe in a given year, you should avoid a penalty. On the other side of the coin, if you realize you overpaid in Q1, you can make adjustments in subsequent quarters.
No matter what, you must avoid getting behind on payments!
Your Annual Tax Return
Even though you’re paying quarterly taxes, you also need to file your annual tax return. When April 15th rolls around, your yearly taxes and Q1 taxes are both due. (Interesting fact: when April 15 falls on a Sunday, tax day is April 17. And when it lands on a Friday or Saturday, tax day is April 18.)
If you overpaid your quarterly taxes, you will claim your refund through your annual tax return.
Reducing Your Taxable Income
Paying taxes as a freelancer means paying taxes as a business. And you have several options for reducing your taxable income, depending on your business structure!
First of all, you can deduct the employer portion of your self-employment tax. That will bring your adjusted gross income down when filing your annual return.
You can also take advantage of another perk: a solo 401(k) retirement plan. You are allowed to contribute as both the employee and the employer, which will give you a significant reduction in your taxable income. Plus, you’ll be boosting your retirement savings!
Keep in mind there are annual limits for employee contributions (in 2021, $19,500, or $26,000 for those 50+). You need to do some math for employer contributions to figure your limit. The formula for self-employed individuals is “net earnings from self-employment after deducting both one-half of your self-employment tax and contributions for yourself.”
If freelancing is not your primary job but is a side hustle, you can only make solo 401(k) contributions based on your freelance income—not your total income. Furthermore, if you’re making contributions to an employer-sponsored 401(k), you are limited to contributing $19,500 spread across both plans. In other words, if you contribute $7,000 to your employer plan, you can only contribute $12,500 to your solo plan.)
What more tax tips? Read on for four tax tips for freelancers >>
Note: We are not legal experts or tax preparation professionals, so always consult an accountant, tax prep professional, or attorney if you have concerns about how to pay taxes as a freelancer. This information is aimed at freelancers in the United States. Freelancers in other locations may find this information useful for determining what questions they need to ask and answer based on their country, region, or city.
Your Turn! What did we miss? What are your best tips and tricks to pay taxes as a freelancer?
Last Updated on July 1, 2023 by Craig Galo