How do freelancers pay taxes?

Freelancing can be an exciting lifestyle. You are your own boss, and you decide whom you want to work with. It is the perfect arrangement for people who don’t like the monotony of a 9 to 5 job, and are confident that their professional skills will pay their bills.

The number of people who opt for freelancing in the USA is steadily increasing since 2017, and is expected to continue the growth. As of 2023, the number was 73.3 million, and by 2024 it had increased to 76.4 million!

True, being a freelancer comes with its unique benefits. You can work from the comfort of your home, or a café, or any place you find convenient. You don’t have to be chained to a desk or a cubicle, and there’s nobody telling you when to start and stop your work day.

Along with that, there are also some downsides to freelancing. First off, it requires a lot of discipline and consistency to make sure that you are motivated to complete work within deadlines. Speaking of discipline, it’s important to pay your taxes on time.

In this article, we’re going to look at what kind of taxes apply to freelancers, when to pay them, and any possible exemptions.

Freelance income taxes

When you’re working on a company’s payroll, they will automatically take care of your social security and Medicare taxes while paying you. In fact, your employer will pay half of those taxes. Freelancers have to basically take care of two kinds of taxes- income tax and self-employment tax.

Self-employment tax

As a freelancer, since you’re your own employer, you have to pay the self-employment tax. The SE (Form 1040) will help you calculate your self-employment tax. This tax will apply to you if you have net earnings of $400 or more. This tax has to be paid in addition to your regular income tax.

What are quarterly taxes?

If you expect a tax bill of at least $1000 a year, you are eligible for quarterly taxes. It means that instead of paying the tax bill at the end of the fiscal year, you have to pay it in parts, four times a year. Technically, even if you are a salaried employee, you will pay your taxes on a rolling basis, but your employer usually is responsible for paying the government on your behalf.

To pay your quarterly taxes, you will need to file a 1040-ES form, and pay a quarter of the annual bill. This form is meant for people who have to pay quarterly taxes on income that is not subject to withholding. Basically, if that income is coming from self-employment, and there is no employer who can deduct it from your paycheck and directly pay the government, then you have to fill this form.

Form 1099

Form 1099 is very important for freelancers. This form is meant for paying taxes on income that doesn’t come from a regular paycheck. It could come from a side gig, interest on some money you have deposited in the bank, or just passive income from the stock market.

There are different versions of this form. For example, Form 1099-K is meant for the income you get by selling stuff online, or offering some services through an online platform. Form 1099-NEC has to be filed if you receive rent payments, prizes and awards, freelance gigs, etc.

Calculating estimated income

Now, how do you know what your annual bill will be? There are ways to estimate that. You can take a look at how much you earned last year. Or, you can just see how much you have earned that quarter (past 3 months).  Make sure you do all this work on time, otherwise you might have to pay interest on late payments!

Step 1: Taxable income

First, figure out how much you will likely earn from your freelance work in a year. Then deduct all the things you will have to pay for- whatever you need to keep your business running. It could be office rent, professional equipment, commute, etc. Whatever amount remains is your taxable income.

Step 2: Calculating the tax amount

Check which tax bracket your income falls under. Depending on your income, you will be expected to pay a certain percentage of that amount in taxes. Then find out how much percentage of it has to be paid as self-employment tax. There you have it- your total estimated tax bill amount!

Step 3: Quarterly payment amounts

Since you have to pay the tax quarterly, you divide the total amount into four installments of three months each. This will be the estimated amount you will have to pay the IRS every three months of getting paid.

Step 4: Send it over to the IRS

You can pay your taxes online through the IRS payment page. Or you can call them up and use their voice response system to pay over phone. In fact, IRS even has an app for this purpose. Finally, you can always go old school- go to the bank and write them a check.

Tax deductions

If you feel overwhelmed by your tax bill, you’re not alone. But thankfully, there are ways to reduce that amount. It’s important to read about these deductions, you don’t want to end up paying more than you have to.

Basically, you get to claim deductions for things that are ordinary and necessary for you to spend on, to keep your business running. Think about it- what do you need for your work? Start with a home office, furniture, supplies, and any special equipment you need, like cameras, designing tools, software, etc.

Of course, you will need to pay for utilities like electricity and water. If you have to travel to meet clients, that counts too! Make sure you have receipts, so that you can present documented proof of these expenses.

If you are a freelancer worried about taxes, we hope this article gave you a basic idea of what it is like to pay taxes as a freelancer. If you feel overwhelmed by this process, it is helpful to hire an accountant who will help you with it, until you understand it enough to file taxes for yourself. Good luck!