How do freelancers pay taxes?
Now that you know which taxes you may have to pay, it’s time to talk about when and how you will need to pay them.
We’ll start with your quarterly estimated tax payments, which you must make on-time throughout the year to avoid penalties and fees.
Then, we’ll go over the different forms you will need to complete and submit to file your annual taxes. Though all of this paperwork may seem scary and overwhelming, we’ll give you the best tips to make this process as easy as possible.
We may not be able to make tax season your favorite time of the year (is it anyone’s?), but we hope this knowledge will give you the confidence you need to get through it quickly and with ease.
How to pay quarterly taxes as a freelancer
The IRS requires businesses to make four tax payments throughout the year, at the end of each quarter. These “Estimated Quarterly Payments” are just that — what you estimate you owe in taxes for that quarter. You will need to calculate how much you made during that period and pay what you think you will owe on it by the deadlines listed below.
- Payment 1: Period January 1 - March 31
Deadline of April 15 - Payment 2: Period April 1 - May 31
Deadline of June 15
- Payment 3: Period June 1 - August 31
Deadline of September 15 - Payment 4: Period of work September 1 - December 31
Deadline of January 15 of the next year
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If you miss these deadlines, you will have to pay late fees on the outstanding balance.
When you make these payments, it’s important to estimate as accurately as possible. If you underpay, you will have to pay a penalty.
To avoid this fee, freelancers should either:
- Pay more than you think you should to ensure that you pay at least 90% of what you will owe
- Pay the same amount (100%) that you owed for last year’s taxes or, if you made more than $150,000 during 2021, 110% of that amount
You will calculate the actual amount you owe when you file your tax return before April 15th. If you didn’t pay enough, you will have to make another payment to cover the deficit, as well as any penalties you owe. If you file online, you will be able to make this payment when you submit your tax return.
If you paid too much, the IRS will return the excess amount to you. You can use your tax refund however you want, but you may want to consider applying it toward your next estimated tax payment. Doing so will decrease the amount of your quarterly payment and allow you to keep more money in the bank.
You can make your quarterly estimated payments by mailing a check to the IRS with Form 1040-ES, over the phone, or online.
Which tax forms do freelancers use?
When it’s time to file your taxes as a freelancer (typically starting in late January or early February), you will need to complete and submit several forms to the IRS. If you’ve worked as an employee and filed taxes before, you will be using different forms than you did in years past.
1099-MISC vs. W-2
If you do more than $600 worth of work for a client, they will ask you to complete a W-9 form, which provides your taxpayer information to the client for their tax purposes. At the beginning of the year, the client will also send you a form 1099-MISC. This form shows that they paid an independent contractor for work, but didn’t pay any taxes for them because the worker isn’t an employee.
Should I get an EIN?
When you complete a W-9 form for a client, you will need to provide your Taxpayer Identification Number (TIN). This number helps the IRS keep track of any tax information related to you and your business. Many use their personal Social Security Numbers (SSN) for their TIN, but doing so runs the risk that your SSN will fall into the wrong hands, especially if you are giving it to every client you work with. Instead, you can apply for an Employer Identification Number (EIN). This number belongs to your business, so the risks of identity theft are far lower. When you receive your EIN, you will use it for all of the tax documents associated with that business and its income.
A W-2 form, on the other hand, is what an employee completes to show that they belong to an organization. The company, not the worker, is responsible to withhold and submit the income, Medicare, and Social Security taxes that every American worker has to pay. This form tells the IRS to go after the company, not the employee, if taxes weren’t paid.
Unless you are officially hired as an employee, not as a freelancer or independent contractor, you will never receive a W-2 while running your business.
What tax form do I use for freelance work?
When you file your taxes as a freelancer, you will complete three forms: IRS Form 1040, Schedule C, and Schedule SE. Each of these forms provides important information to the IRS, so be sure to complete and submit each one with your tax return.
What is IRS Form 1040?
IRS Form 1040, also called the “U.S. Individual Income Tax Return,” is where you will report how much you made and what you owe in taxes for the previous tax year. You will include your personal identifying info, any income adjustments (more on these later), and how much you paid in estimated tax payments.
Part of completing this form involves calculating and deducting business expenses, for which you will need a Schedule C.
What is Schedule C?
The Schedule C form is where you will report how much money your business made or lost during the previous tax year. Designed for self-employed workers, this form is where you will list all of your business deductions (we’ll go over these in the next chapter) and calculate how much you can deduct from your income.
If you have multiple businesses or you and your spouse both have separate businesses, you may be required to file multiple Schedule C’s with your tax return.
What is Schedule SE?
The Schedule SE is the self-employment tax form. Once you know the total amount of your taxable income (how much you made during the year minus any deductions), you will use the Schedule SE to calculate how much self-employment tax you will pay. This is calculated as your total taxable income amount multiplied by the SE tax rate, which is currently 15.3%. Though this form requires a bit of math, it’s not as difficult it seems. Just take your time when completing it to make sure you don’t calculate incorrectly or make a mistake with any of the numbers.
A note for partnerships, corporations, and employers
The processes and forms we just discussed are made for business workers who own and run their businesses on their own. If you have one or more partners, any employees, or have registered your business as a C or S corporation, your tax-paying process is a bit different. See Chapter 4 for a detailed explanation of your tax needs.