The Best Tax Tips For Freelancers

With the increasing popularity of sites like Upwork, many professionals are embracing freelance work. These platforms allow professionals to build their businesses, supplement existing income, and free themselves from the 9-to-5 grind. As a freelancer, the IRS classifies you as self employed, even if you also have a W-2  job. Whether you’re fulltime or parttime, you have to pay taxes on your freelance income. 

tax tips for freelancers
Image Credit: Mashable,

Stay on Top of Estimated Taxes

Freelancers need to make they make all of their required tax payments. This includes both self-employed taxes and regular income tax. If you work as a freelancer and expect to owe more than $1,000 in taxes, you must make estimated tax payments. Make sure you accurately calculate your tax liabilities and make sufficient payments before the quarterly deadline. You can pay estimated taxes online or via mail. Learn more about how to pay your estimated taxes here

Independent contractors need to make sure they stay on top of their estimated tax payments. The IRS doesn’t want to wait all year to get paid, so they expect you to pay taxes every quarter. You’re responsible for making these payments, so you need to comply accordingly. As mentioned above, you have to pay estimated tax payments on a quarterly basis. Usually, the deadlines fall on April 15, June 15, September 15, and January 15.

You can calculate your quarterly estimated tax liabilities using your total tax bill from the previous year. First, take last year’s tax total and divide it by four. The total will be your quarterly payment obligation.  You can adjust this payment amount as needed, and you’ll receive a refund if you overpay. 

Be Prepared for Self Employment Taxes

The IRS classifies most freelancers as self-employed earners, so they’re subject to self-employment taxes. Self-employment taxes include both the employee and employer portion of Social Security and Medicare taxes. If you expect to owe $1,000 or more in taxes, you should pay self employment taxes on a quarterly basis as part of your estimated tax payments 

Track Your Net Income

The key thing to note, however, is that these taxes are assessed on net income. Meaning your earnings after deductions. If you have more legitimate business deductions than earnings, then you have a net loss and therefore would not make any estimated tax payments. However, for service businesses, including freelancing, this is often not the case since there are few deductions associated with providing your services. 

Many times when we work with a new freelancer reporting their income, we have to educate freelancers on typical deductions that are available in order to reduce the tax burden in a legitimate way. Here’s a spreadsheet we’ve prepared on Dropbox for being able to do this: Business Deductions

Get Your 1099s in Order

Freelancers are independent contractors so they usually receive 1099 forms for reporting their income. Form 1099 reports miscellaneous income outside of  W-2 earnings. For example,  you’re a freelance web designer and a digital marketing agency hired you to complete a job. The agency has to send you a 1099 form to report your wages. Most side gigs usually qualify as 1099 income, including Uber driving, Turo hosting, or Airbnb hosting. Sometimes, these platforms send you a 1099 form that reports your income, but it varies from platform to platform. Even if they don’t send you a 1099 form, you’re still responsible for reporting your earnings to the IRS. 

upwork taxes for freelancers

Form 1099 K

Upwork issues form 1099 K if you reach 200 transactions and $20k in revenue. You need to check both boxes to qualify for a 1099 K. As a result, many freelancers won’t receive form 1099 K from Upwork. However, you’re still required to report your income. If you get a 1099 form, you must report your earnings accurately. The IRS also gets a copy of the form, so they’ll notice if you try and under-report your income.

Be sure that your gross earnings equal or exceed the 1099 income that your client’s report. The IRS has ways of finding out your gross earnings and they will jam you up if they catch you out of pocket. The Feds can issue a notice of proposed adjustment and tax all of your earnings, effectively disqualifying you from taking any deductions.

More Freelance Tax Tips

Some important tax tips for freelancers should also consider include:

  • Have a good accounting system in place to keep track of all expenses and income.
  • Take advantage of the home office deduction. This allows you to claim a portion of your rent,  mortgage interest, utilities, and insurance as a deductible expense. 
  • Know which business expenses qualify as deductible expenses. Click here for a complete list.
  • Contribute to your IRA. This is a really important tax tip for freelancers, as it helps fund your retirement and also qualifies as an above the line deduction. The maximum deduction is  $6,000. 
  • Work with a good tax advisor. It’ll save you time, stress, and money.

Tax Help For Freelancers

Taxes can be complicated, especially if you have more than one source of income. If you’re drowning in 1099s, you should probably talk with a professional tax advisor. Shared Economy Tax specializes in taxes for indepdent contractors and freelancers. Their team of certified pros can help you get the best deal possible on your taxes. Get started today with a free one-on-one strategy session with a certified tax pro, or sign up for our free newsletter using the form below to get free tax tips delivered to your inbox.

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About the Author

Miguel Alexander Centeno

Miguel Alexander Centeno is an author, speaker, and tax leader at Shared Economy Tax. A former Big 4 tax manager, he represents taxpayers in all matters before the IRS, including the U.S. Tax Court. He has been quoted in the Wall Street Journal, Fox Business, and MSNBC on tax related articles and has testified before the U.S. House of Representatives as a part of hearings for the Tax Cuts and Jobs Act. A father of three, Miguel is an avid acoustic guitar player, gravel cyclist and once-a-week yogi.
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