If you’re a freelancer or independent contractor, you may have questions about how to submit your tax return for freelancers. While a lot goes into it and you want to make sure you understand what you need to be doing throughout the year and when your tax return is due, this guide should help you feel confident about understanding freelance taxes.
Being a freelancer has so many perks: flexible schedule, ability to travel, and the option to expand your business. But, one drawback is that taxes aren’t as easy as simply receiving a W-2 to the IRS at the end of each year from your employer.
Keep reading to learn everything you need to know about filing taxes for freelancers. If you are based in the UK, we also have a guide to submitting your UK freelance tax return.
How to File a Tax Return for Freelancers
Any US freelancer who earns $400 or more must file yearly taxes. You’re responsible for paying self-employment taxes, federal income taxes, and state income taxes (if that applies to where you live).
Right now, these states do not require you to pay a state income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming.
Note: Many accountants specialize in taxes for freelancers. You could consider hiring an accountant if you want help. While an accountant comes at a cost, a good accountant can save you time and money. With that said, the information below tells you everything you need to know to successfully file taxes on your own.
When to File and Pay Taxes for Freelancers
Tax returns for all US citizens, including freelancers, are due on April 15th for the previous year. This means you have from January 1st until April 15th to submit your tax return for freelancers.
However, you’re required to pay estimated quarterly taxes throughout the year. This is equivalent to traditional employees getting taxes taken out of each paycheck
There are 4 quarters in the year: January 1st – March 31st, April 1st – May 31st, June 1st – August 31st, and September 1st – December 31st. Quarterly taxes are due on the 15th of the following month. For example, you’ll pay taxes for the first quarter on April 15th.
You can determine what your quarterly tax payment should be based on what you made last year or what you predict you’ll make this year (if you’re a new freelancer or plan to make more/less than you did as a freelancer last year). If you over or underpay, you’ll either get money back after you file your taxes or you’ll owe more.
It’s important to understand that if you underpay, you may owe a fine when you file your taxes at the end of the year. With that said, don’t let this stress you out too much! As long as you’re pretty close to what you think you’ll make, your penalty shouldn’t be too much.
Most tax experts recommend setting aside 25 – 30% of what you make to pay in taxes. Many freelancers find that with their deductions (more on that later), they get money back at the end of the year if they pay 25 – 30%.
What Forms to File
When it’s time to file your tax return for freelancers, you’ll file a form 1040 along with anyone who earned any income last year. Before knowing what additional forms to file for your taxes, you’ll need to determine the structure of your business: sole proprietorship or LLC.
By default, most freelancers run their business as sole proprietors, which is perfectly fine. A sole proprietor is simply someone who runs their own business. If this is you, you’ll file a Schedule C form along with your tax return.
If you have a lot of assets to protect, you may want to consider an LLC. However, most freelancers don’t do this. If you do, there are a variety of tax forms to choose from, so you’d probably want to consult a tax professional for this.
When it’s time to file your taxes, or your 1040, most tax software will walk you through exactly what you need to do. Keep reading for the best tax software for freelancers!
Information and Documents You Need When Filing US Tax Return for Freelancers
To make life easier when it comes to filing taxes for freelancers, you want to keep up with all necessary information and documents throughout the year.
Something like dedicating a Google folder on your drive to tax information and documents can help you stay organized.
Here’s a list of items you need in regards to income tax for freelancers:
- Your social security or employee ID (EID) number (Most freelancers are fine to use their social security number. Learn more here.)
- All income earned
- All expenses paid for and documentation for deductions (more on that later)
- Any benefits or support you’ve claimed
- Bank interest summaries
- Form 1099-MISC (Any client who pays you more than $600 may provide you with this.)
Tip: Having a bank account for business purposes only can be a lifesaver when it comes to sorting and tracking all income and expenses. Check out the 9 best bank and credit cards for digital nomads and freelancers.
What Income to Claim
If you work for a company that pays you more than $600 during the tax year, they may provide you with a 1099-Misc. Either way, you’re responsible for reporting all income earned as a freelancer. So make sure you keep track of this throughout the year.
Note: If you used to be a traditional employee for a company, you received a W-2 form that showed exactly how much you made. You used this form when it was time to file taxes. As a freelancer, it’s up to you to document how much your clients pay you throughout the tax year.
Tax Deductions for US Freelancers
A common question in the world of freelancing is what can you deduct as a business expense. In short, anything you purchase that’s used for work can be written off as a deduction. It’s very important to make sure you keep a record of any expense you plan to write off as a deduction in the rare chance you get audited.
It’s best to have photos of or physical receipts and keep them in the Google doc mentioned above or wherever you keep information and documents. Worst-case scenario, you can use bank statements, but itemized receipts are best.
When you file taxes for the previous tax year, be sure you hold on to these receipts for a few years.
So, what are examples of tax deductions for freelancers?
- Office space and supplies
- Travel expenses if it was used for business purposes
- Clothes if they’re required for your job
- Paying employees or other freelancers to work for you
- Training courses, books, newspapers, and magazines that you purchase for business
- Advertising and marketing costs, i.e. website and branding material
- Subscriptions to business software and apps
- Phone and internet bill if used for business (or a portion of it’s also used for personal)
You can learn more about business expenses here.
Best Tax Software and Accounting Services for US Freelancers
As mentioned, if you want more help throughout the year or during tax season, you can always consult with a tax professional.
If you want to manage your own accounting and taxes with the help of excellent software, check out these services. You may combine a couple of these to have software to use for everyday business, then one to use when it’s time to submit your yearly tax return.
- Quickbooks: This accounting software offers a one-stop shop to organize and manage your business. It comes with accounting, inventory, payroll, tax filing, and invoicing. You can also track your bank account, manage expenses, budget, and process payments with clients.
- Wave Accounting: For something a little more simpler, Wave Accounting is a great option. And, it’s really all most freelancers need in terms of getting paid and tracking income and expenses. Best of all, it’s free!
You can send professional invoices, track payments, manage payroll, manage finances, and scan receipts.
- H & R Block Self-Employed: This online tax software is only used during tax season when it’s time to file your tax return for freelancers. It provides easy-to-follow steps to help you complete your tax return efficiently.
It’s a little more pricey than other tax software, but it provides all the resources you need to take full advantage of your tax options. You can also pay to speak to a tax professional for further assistance.
- TurboTax Self-Employed: If you’re willing to pay a little more for even more help filing your taxes, you might go with TurboTax for freelancers.
It comes with a free IRS audit risk assessment and a step-by-step guide to find the best tax deductions for you. There’s also the option to call or have a live chat with a representative if you need help.
Final Tips for Filing Your Tax Return for Freelancers
The most important thing to know is that staying organized throughout the year will make things so much easier for you when it’s time to file taxes. Again, it’s best to pay estimated quarterly taxes throughout the year to avoid any late payment penalties.
You can file your tax return as soon as January 1st for the prior year and they’re due by April 15th.
If you’ve paid enough quarterly taxes, you won’t owe anything extra when filing your tax return. If you underpaid, you’ll have to pay the difference, and you may have a penalty. If you overpaid, you’ll receive the difference back. Some people actually like to do this to get a surprise bonus each year!
Managing money and budgeting can be a challenge for some freelancers. That’s why we created a list of 10 budgeting tips for freelancers and digital nomads. Check them out here!