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Freelancing and side hustles are fast becoming the new normal in the American workforce. According to a 2018 Gallup poll, 36% of American workers (well over 50 million people) are engaged in some type of freelance or side hustle occupations.
If you are one of them, you’ll need to be aware of the income tax consequences affecting freelancers and side hustlers.
Just like everyone else who earns money in any capacity, freelancers and side hustlers must also pay income tax. But because of the unique work style, there are specific factors that affect this group of workers.
That’s the reason we’ve created this freelancers and side hustlers guide to taxes.
Do Freelancers Have to Pay Taxes?
The short answer is yes! Not only will you have to pay ordinary income tax on your freelance earnings, but you’ll also have to pay what’s known as the self-employment tax.
We’ll get into the implications of that tax later. Obviously, the combination of the two taxes has the potential to create a large tax liability.
But as a freelancer or side hustler, you’re considered to be self-employed, which means you can also write off expenses related to the production of your income.
There are also a number of additional deductions unique to the self-employed. There are so many in fact, that it’s entirely likely you’ll pay less in federal income tax than you will in self-employment tax.
How Do Freelance Taxes Work?
As a freelancer or side hustler, you’re probably earning income from multiple sources. For example, as a freelancer you may have several clients you perform services for.
At the end of the year, you’ll receive IRS Form 1099-MISC from each and every client who has paid you at least $600 for the year. The same may be true if you have a side hustle, though you may also have income from retail customers that you’ll need to keep track of.
Even if you do receive one or more 1099s, you’ll still need to keep accurate records of all income received from your freelance or side hustle occupations. Your own records will assure that all income has been accounted for, as well as to help you detect any errors a client may have made in preparing a 1099.
How to Prepare & File Your Income Tax Return
Just like all other taxpayers, you’ll need to file an individual income tax return, or IRS form 1040. But as a freelancer or a side hustler, you’ll need to include a completed IRS Form Schedule C, Profit or Loss from Business (Sole Proprietorship) with your return.
Schedule C will list your gross income from your freelance or side hustle activities, as well as all your expenses. Using the form, you’ll deduct your business expenses from your business income, to produce your business net income.
The business net income will then be transferred to two places on your tax return:
- 1040 Page 1 as business income, and
- Schedule SE, Self-Employment Tax
Tax Software for Freelancers
Since preparation of income tax for the self-employed is more complicated than it is for W-2 income earners, it’s strongly recommended that you use a tax preparation software program.
Two of the most popular are TurboTax and H & R Block. There are more provisions in the tax code for the self-employed than most taxpayers understand, and a good tax software program will take care of the details for you.
Tax Deductible Expenses for Freelancers & Side Hustlers
You also need to keep a record of expenses incurred in connection with your freelancer or side hustle income.
Here are some common tax-deductible expenses for both freelancers and side hustlers:
- Business use of your car. This can include either actual expenses, or the IRS standard mileage rate of $0.58 per mile for 2019.
- If you work out of your home, you can claim business use of your home, deducting expenses for your home or apartment based on the percentage of square footage used for your business.
- Costs and expenses for equipment purchased for your business, which you can deduct in the year of purchase using Section 179 depreciation. This can include computer equipment, mobile devices, computer software, and other business-related equipment.
- Sales, marketing and advertising costs
- Legal and professional fees.
- Travel expenses for business purposes.
- Meals and entertainment (subject to a 50% limit).
- Phones and Internet costs.
- Postage and delivery costs.
- Miscellaneous office and business expenses.
You’ll need to keep accurate records of all expenses paid, as well as supporting documentation. This will be particularly important on large expenses.
What Is The Self-Employment Tax?
This is a great big OUCH for the self-employed, including freelancers and side hustlers. Though it’s known as the self-employment tax, it’s really your contribution to Social Security and Medicare tax as a self-employed person.
The tax is 15.3% of your net income, and that’s the OUCH part of the picture.
Now if you’re working for someone else, you would pay just 7.65% of your salary for Social Security and Medicare. But your employer would pay a matching contribution, also 7.65%. That will bring the total tax to the 15.3%.
Since you’re self-employed, you’ll pay both halves of the tax. That’s where the 15.3% comes from.
That tax rate will apply on a net business income of up to $132,900. Above that amount, you’ll continue to pay at a rate of just 2.9%, which represents the Medicare portion of the tax. There’s no income ceiling on that part of the tax.
The IRS allows you to reduce your net business income by the amount of the employer contribution – 7.65%. And after you calculate the tax, you can deduct half the total from your taxable income for federal income tax purposes.
As you might imagine, the self-employment tax is often higher than the federal income tax liability for many self-employed people.
Other Tax Deductions for Freelancers and Side Hustlers
Earlier we provided a healthy list of business deductions for your freelance and side hustle income. But there are other deductions you can take that will reduce your taxable income for federal income tax purposes (but not for the calculation of the self-employment tax).
- As mentioned earlier, you can deduct half your total self-employment tax against your income for federal income tax purposes.
- Self-employed health insurance premiums. If you pay your own premiums, they can be deducted against your federal taxable income, as long as you have sufficient net business income to cover the premiums.
- Contributions to self-employed retirement plans. These include contributions to traditional IRAs, SIMPLE IRAs, SEP IRAs, and Solo 401(k) plans.
- The standard deduction of $12,200 for single taxpayers, or $24,400 for married filing jointly.
Any of these deductions, if they apply, should be deducted from your net business income for the calculation of your federal income taxes (but once again, they cannot be deducted in calculating your self-employment tax).
How Much Money Should I Set Aside for Taxes as a Freelancer?
If you have completed at least one full tax year as a freelancer or side hustler, you can usually calculate your tax liability based on last year’s income. For example, if you earned $50,000 last year, and your total tax liability (including federal income tax and the self-employment tax) was $10,000, you’ll need to make tax estimates for the current year based on that amount.
If you’re using a paid tax preparer or a tax preparation software program, the current year tax estimates will be calculated for you.
However, if this is your first year as a freelancer or side hustler, or if your income is substantially higher this year than last, determining freelance taxes is more complicated.
This is why it will be important to keep accurate records of both your earnings and your expenses. If need be, use a bookkeeping software package, like Quickbooks. It will not only enable you to keep accurate records of your income and expenses, but it can also let you know what your net income is at any point during the year.
Determine Your Freelance Tax Liability
From there, you’ll need to determine what your freelance tax liability will be. That will be easy enough to do using the self-employment tax, since it’s a flat tax of 15.3%. But you may also need to calculate a rough estimate of your marginal tax rate for the current year.
If your marginal tax rate looks like it will be 12%, then you should plan to put about 27% of your net income aside for federal taxes – 12% for federal income tax, plus about 15% for the self-employment tax. But you’ll also have to calculate your state income tax, based on your marginal state income tax rate.
Do Freelancers Have to Pay Quarterly Taxes?
As a freelancer or side hustler, you won’t have taxes deducted from your income. You’ll need to pay taxes directly to the IRS, and also to your state tax authority. These are set up on roughly a quarterly basis, with a schedule that looks like this:
- April 15
- June 15
- September 15
- January 15 of the following year
The easiest way to calculate this is to simply take your total estimated tax liability for the current year, and divide it by four. You’ll then make one payment for each of the four estimated tax due dates.
The most convenient way to do this is to make payments directly from your bank account to IRS Direct Pay. There is no fee for using this online payment system, and your payments will be credited immediately. This will avoid the possibility you will incur penalties or interest for late payments.
If all goes well, and you’ve adequately estimated and paid your tax liability on the required due dates, you won’t owe additional taxes when you file your return on April 15.
Don’t Forget To File Taxes for Freelance Work
Freelancing and side hustling provide so many benefits, including greater control over your work, your time, your income, and the sources you derive it from.
But you’ll still have an obligation to pay your taxes.
And since you don’t have automatic withholding, you’ll need to come up with a workable system yourself. Follow the steps in this guide, and you should be fully prepared to file and pay your freelance taxes by April 15.