Learn how to do taxes as a freelancer and stay on top of your finances with our step-by-step guide.
When you’re an Independent, you’re in charge of your destiny — and your taxes. The freelance life is liberating, but the additional responsibilities can add up if you’re not well prepared. That’s especially true when it comes to knowing how to get paid and how to do taxes as a freelancer. From payment options to helpful tips on settling up with the IRS, this guide will have you managing your freelance finances like a pro in no time.
Freelancing 101: The pros and cons 👨🚀
Whether it’s your full-time job or something you do on the side, freelancing is a fantastic way to earn a living. As an Independent, you set your own schedule, be your own boss, and choose projects and clients that genuinely excite you.
That said, with this power comes great responsibility. When working freelance, taxes are one of the most critical fiscal responsibilities. Failure to comply may result in unwanted stress and hefty tax bills, both of which are, thankfully, avoidable.
How to do taxes and accept payment as a freelancer 💰
When you work as an Independent, one thing’s for sure: You need to figure out how to get paid. Several options to accept payments exist, depending on what tools and methods you and your clients prefer.
Checks are a traditional, simple, and cost-effective way to receive payment. You won’t incur fees when you deposit a check to your bank account, but there can be delays, including waiting for it to arrive in the mail and clear with your bank—something to keep in mind if you need to access the funds immediately.
PayPal is a popular payment method for Independents. Creating an account is free, and clients pay electronically; it’s then up to you to transfer the funds to your bank account. PayPal is reliable, but it charges a 2.9% transaction fee on the amount you receive, plus $0.30 for each PayPal payment.
Credit cards 💳
As an Independent, accepting credit cards as a payment option is excellent for clients who prefer plastic. You can process these payments through PayPal or another similar online payment system, or by using a processing product like a wireless terminal. Many Independents use apps and service providers like Google Wallet, Wave, Square, or QuickBooks to avoid additional equipment costs.
Electronic funds transfer (EFT) 🔁
EFT is an easy and affordable payment method that transfers funds directly from one bank account to another. While this option is easy to set up, payments may take up to four days to process, and both banks must support the transfer.
Accounting software 📀
Some accounting software platforms offer built-in systems for sending invoices and receiving payments. Accounting programs like QuickBooks or FreshBooks automatically link revenue to clients and send payment reminders, but check to see if additional fees are required to use the payment services.
Cash App 🤑
Cash App allows users to send and receive payments quickly and easily online. As an added convenience, clients can issue payments without needing their own Cash App account. The money goes directly to your checking account or linked debit card and takes several business days to arrive, but instant transfers are available for a fee. One drawback is that Cash App can only be used to make or receive payments between U.S. bank accounts.
Contra is a commission-free online platform designed specifically for Independents and their clients. Sign up to easily invoice, accept payments, and keep all your funds in order.
To make the payment process simple, consider these tips:
- Make it easy. Invoice your clients on time.
- Invoice often. Send invoices regularly to ensure a prompt payment schedule.
- Follow up. Don’t be shy when following up with clients. It’s their responsibility to pay you on time!
Now that you know more options for receiving payments as an Independent, you need to make sure you know how to file — and do so on time!
How to file taxes as a freelancer: 8 things to keep in mind 💡
1. Understand what taxes are as an Independent 💵
As an Independent, these are need-to-know tax basics:
- Self-employment tax. If you earn more than $400 in a year from one client, you must file taxes as a self-employed person for those earnings. You must pay a self-employment tax of 15.3%, including Social Security and Medicare taxes.
- Freelance tax forms. Freelancers receive a 1099-MISC form from each client who pays them more than $600 (instead of a W-2 form). You must report your 1099-MISC income on a Schedule C attachment when filing your taxes.
- Freelance tax requirements. Independents must pay quarterly tax installments if they expect to owe $1,000 or more. Use IRS Form 1040-ES to estimate these taxes accurately. If you underpay, you will owe the IRS the remaining balance and may have to pay a fine. Independents may owe state income tax and local taxes, too.
2. Know your business structure 🏛️
As an Independent, your business’s legal structure affects your personal assets and tax obligations. Many Independents file taxes as sole proprietors using a Schedule C form. On the other hand, S-corp status is more complex but may offer tax benefits.
Limited liability corporations (LLCs) require additional fees but protect individual assets. LLC taxes vary; Independents may pay unemployment, federal, state, and FICA taxes. These amounts vary based on income.
3. Consider hiring a professional 🧑💻
Every transaction matters, and because the IRS regularly updates tax laws, it’s ideal to have some assistance to ensure all your bases are covered.
4. Understand how to estimate quarterly taxes 📅
Independents owing at least $1,000 in taxes must pay quarterly estimated taxes. Use the previous year’s tax return to help estimate payments; if you overpay, the IRS will issue a correction. Failing to pay quarterly taxes results in a penalty during tax filing. Married Independents can have their spouses increase withholding taxes to reduce tax bills.
5. Declare all your business income 📣
Independents must report all their income, including cash and app payments, and should receive a 1099-MISC form from every client that paid over $600 for the tax year. To help prevent mistakes, cross-check the form against personal accounting documents.
To remain in good standing with the IRS, file your taxes accurately and on time — if you need more time, programs are available to request a deadline and payment plans.
6. Prepare for tax day 💸
If you work freelance, how much to save for taxes can be confusing. Financial experts recommend saving approximately 30-35% of your earnings for taxes, depending on where you live and your current income. Consider having a business credit card and a separate savings account to help save for tax payments.
7. Understand your business expenses before you file 🧾
As an Independent, you’re eligible for various tax deductions. Many people miss out on potential deductions simply because they don’t understand exactly how they work.
To help identify potential deductions, consult an accountant specializing in 1099 independent contractors. Common deductions include home office space, vehicle expenses, travel expenses, internet and phone bills, health insurance, office supplies, hardware and software, advertising materials, legal or professional services, contract labor, licenses, taxes, and business meals.
8. Don’t expect a tax refund 🙅
Most Independents do not receive a tax refund. Unlike individuals with an employer, Independents are responsible for sending in their own tax payments, making overpaying less likely.
In most cases, Independents receive refunds if they overpay their quarterly estimated tax payments or qualify for an earned income credit (EIC). The EIC is not available for high earners.
Don’t give up on your dreams ✨
Working as an Independent is liberating and fulfilling, but it also comes with added responsibility. Thankfully, navigating the complex world of freelance taxes is less daunting when you’re organized; consider consulting a tax professional to set you in the right direction, and always remember to save a portion of your income. Whether you’re a seasoned freelancer or you’ve just started working for yourself, check out our blog, The Contrarian, for tips on finding work, managing finances, and more.