How to Do Taxes as a Freelancer in the USA for 2021
Confession: Although I’ve freelanced for upwards of ten years, it was only in the last two to three years that I prepared my own taxes. And even then, it took a while for my anxieties to subside.
Concerns included: Maybe I’d overpaid or underpaid the IRS? Actually, it was the latter that I was most afraid of, dreading that IRS-addressed envelope in the mail.
Below, you can learn how to file your taxes as a freelancer in the United States, with details about the most methods and best practices available.
Table of Contents
How to File Taxes as a Freelancer, Gig Worker, or Independant Contractor
As a freelancer, gig worker, or independent contractor, you’re responsible for your own Social Security and Medicare taxes, which amount to 15.3% of your net business profit.
You fill out taxes four times a year, which, thankfully, you can pay yourself online. The deadline is April 15, 2021. Forget that, and you’ll receive a fine.
Filing taxes may be a hassle, but reputable tax filing providers give you online tools to help you, aside from which the IRS provides its free resources for certain relatively low-earning freelancers. Tax deductions, too, are a boon that people with “regular” jobs lack.
Important Things to Consider When Filing Your Taxes as a Freelancer
- Different freelance structures have different rules: Are you a sole proprietor, an S-Corporation , a C-Corporation, or an LLC? An independent contractor?
- You only pay taxes as a freelancer if you make more than $400. Anything less than that, and you're free.
- You pay the IRS four times a year.
- Clients who paid you more than $600 should give you a Form 1099-MISC by January 31, 2021.
- You pay the IRS according to your tax bracket. For example, how much you earn and your filing status.
- Some states and cities have their own tax laws due quarterly in addition to federal taxes.
Tax Filing Forms for Freelancers
Except the Form 1040, the varied Schedule C is different for other situations.
- Form 1040 Schedule SE to calculate your quarterly freelance taxes
- Schedule C lists the business income and expenses and calculates the net income of the business.
- Schedule C-EZ used by LLCs, S-Corporations or C-Corporations to list only the primary information about the business and includes only a simple calculation of your net income.
- Schedule C-SE is an alternative to Schedule C-EZ and used for reporting self-employment tax.
Federal income tax (IRS 1040)
You pay the Federal tax for federal programs, such as national defense, social programs, law enforcement, and dabbling with that horrendous national debt.
There are seven tax-brackets you can fall into, each based on your taxable income and filing status.
Tax deductions climb the ladder, from 10% to 37% plus for the highest earners.
State Income Tax for Freelancers?
Some states and cities charge you taxes for programs that include education, healthcare, transportation, and public assistance.
These taxes pay for the state expenses in which you work, not where you live. If you work in multiple states, you pay multiple states.
The taxes are filled out on a separate state return, calculated either on a flat rate or on the same bracket system as federal taxes.
Online Tax-Filing Software for Freelancers in the United States
While the IRS provides free software for those earning $72,00 per year or less, other tax filing providers provide their own (mostly) reasonable options. Here are some of the best 2021 are the following:
H&R Block Free
Best for simple returns at a reasonable price with simple deductions and user-friendly. There’s a free version that comes with Form 1040 but lacks the Schedule-Cs.
Best for ease of use. TurboTax is very user-friendly with an interview-type Q&A experience, almost as though you were chatting with your tax preparer. It can be a costly option, though.
TaxAct is online software that’s cheaper than TurboTax or H&R Block. You can also get on-demand, on-screen access to a tax pro (for a fee).
TaxSlayer bases prices on the level of support rather than the functionality level, which could make this option the cheapest bet for confident tax filers who need little support.
H&R Block Free and TurboTax are best for beginners, with TurboTax being your most expensive option. TaxAct and TaxSlayer are your cheapest bets, with TaxSlayer offering less customer support but the cheapest package.
How to File Freelance Taxes: The Steps
- If you plan to pay online, register for a PIN some months ahead of the filing date.
- Collect your 1099 from clients who have paid you more than $600 that past tax-filing year. Even if you haven't received those 1099s, you're still required to report those earnings.
- Use your financial statements to total your business income.
- Use receipts or your financial statements to total your business expenses
- Calculate your deductions.
- Gather your tax forms: The 1040, Schedule-C or Schedule C variations.
- File your returns through an online tax-filing tool or through the IRS free tax filing software. Alternatively, you could download paper forms from the IRS that you manually fill in and mail.
- Pay your taxes onlineor mail a check, money order, or cashier's check to the given IRS address.
Our Final Thoughts
Arguably, taxes are an even bigger hassle for freelancers since we have to file them quarterly at the risk of fines. That said, there is easy and useful tax-filing software that can help us. Hopefully, freelancers can qualify for tax deductions, too.
Frequently Asked Questions
Rule of thumb: Tax deductions can only be expenses that are primarily related to your business. So, a pleasure trip to Paris where I incidentally met a client doesn’t count in contrast to a trip to Paris for a convention.
The most common business expenses are:
- Home deductions if you run your business from home
- Expenses like phone, internet, and other utilities
- Business equipment if you regularly buy small equipment. Familiarize yourself with IRS Section 179 and Form 4562. Old equipment? See how Section 1231 could render that tax-deductible.
- Health insurance premiums
- Travel or expenses incurred while entertaining clients
- Domain and website hosting costs
- Office supplies
- Advertising costs
- Continuing education
- Gas mileage and other vehicle-related expenses
- Certain self-employed/freelance-related memberships
For more complex business expenses:
- Students and recent college graduates could deduct student loans from their taxes
- If you’re underearning, you could qualify for a 50% self-employment tax deduction
- You could qualify for the most recent qualified business income deduction (QBI) due to COVID-19
- January 1 through March 31: Due Date April 15
- April 1 through May 31: Due Date June 15
- June 1 through August 31: Due Date September 15 due to COVID-19
- September 1 through December 31: Due Date January 15 of the following year9
To my chagrin, I once learned that the IRS deducts 0.5% for each month of late taxes, which hops to 5% per month up to 25% for ditching taxes altogether.