Independent Contractor Taxes: It Doesn’t Have to Hurt (That Bad)


Reviewed by Robin Hartill, CFP®
A woman does her taxes at the kitchen table as her two children play with toys.
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Zero alarm clocks. Working from the couch. A full-time yoga pants wardrobe.

Freelancing certainly has its perks. Filing taxes is not one of them.

Whether you’re considering making the big leap into the world of freelancing or you’re already in the deep end, your tax situation doesn’t have to be that complicated — we promise!

Here’s what you need to know to keep Uncle Sam happy as you navigate your entrepreneurial venture.

How Do You Pay Taxes as an Independent Contractor?

The advice below will vary if you’ve chosen a business structure like an S-corporation or a limited liability company (LLC). Since sole proprietorships are the default for most freelancers, we’ll focus on what those taxes look like.

First thing’s first: making quarterly payments.

Estimated Quarterly Taxes: How Much Do You Need to Set Aside?

When you earn money as a freelancer, the transaction is direct: You name a price, you perform the service and your client pays you — without withholding any money to cover taxes or benefits.

Of course, the government still wants its cut even if you’re self-employed — which means it’s your responsibility to dole out that portion. A good rule of thumb: Set aside about 30% to 35% every time you get paid you make to cover your federal taxes.

This will include both federal income tax — which is organized by tax brackets that run from 10% to 37% — and self-employment tax. Most traditionally employed workers pay 7.65% of their paychecks for payroll taxes that fund Social Security and Medicare, which their employer matches. But when you’re an independent contractor, you owe both the employee and employer’s share, or 15.3% as long as you earn more than $400 in freelance income.

When Are Quarterly Taxes Due?

Instead of having these taxes withheld from each paycheck, you’ll ship them off on a quarterly basis using Form 1040-ES. Quarterly tax payments — which, as you may, notice don’t break down into even quarters — are due:

  • Jan. 15: For Sept. 1-Dec. 31 of the previous year.
  • April 15: For Jan. 1-March 31.
  • June 15: For April 1-May 31.
  • Sept. 15: For June 1-Aug. 31.

Quarterly taxes are super easy to file online. However, you can also pay by phone or snail mail; the address will vary depending on your location. Keep in mind that the 30% to 35% you set aside may not cover state or local taxes, which vary depending on your location.

 

How to File Your April Tax Return

Just like a traditionally employed worker, you’ll still need to file a tax return if you’ve made at least $400 in freelance income. So long as you’ve kept up with your quarterlies, this shouldn’t be too painful — but if you’ve missed payments or neglected the self-employment tax, you may find yourself owing the IRS.

Your April return should report the sum of your earnings, which is used to calculate your tax bracket and total tax burden. Of course, for freelancers, this means you’ll need to be diligent about recording every single penny you earn.

Calculating Your Total Income

Each client who pays you more than $600 in a year’s time must file a form 1099-MISC in your name, which you’ll receive at tax time in place of a W-2. It lists your earned wages but not any withheld taxes — because, again, as an independent contractor, that’s your responsibility.

Pro Tip

Even if you earn less than $600 from a client, that income still counts toward your annual total, which means you need to include it on your return.

By the way, although it’s tempting to under-report your income in an effort to pay less in taxes, there’s good reason not to — namely, it’s a crime. The penalty for underreporting is 20% of the amount you owe.

Do You Still Get a W-2?

A lot of freelancers work part time for someone else in addition to their side hustle for more reliable income and, in some cases, health insurance.

If that’s you, your employer will still need to file a W-2 for you. Your employer must send it to you no later than Jan. 31 for the previous year, and you’ll need it to file your return. It displays your earned wages, Social Security contribution, withheld federal income and Medicare taxes, and more.

This will affect your overall tax burden, and may be a good reason to hire professional help.

FROM THE SAVE MONEY FORUM

What Can You Deduct as a Small Business Owner?

Now for a tax topic we can all love: deductions.

One cool thing about freelancing: as a small business owner, you’re eligible to make certain business-related deductions, which can lower your overall tax burden and help keep your enterprise cost-effective to run.

Pro Tip

The IRS language on deductions is pretty open-ended: “To be deductible, a business expense must be both ordinary and necessary.” So you can make an argument for deducting an array of costs.

Some of the most common deductions for freelancers include:

  • The cost of your home office, but you must have a designated space in your home that you use exclusively for business purposes.
  • Office supplies.
  • Travel expenses related to work.
  • Meals and entertainment, within reason, that are related to client meetings.
  • Professional services, like those of an accountant.
  • Half of your self-employment taxes.

Should You Hire an Accountant?

As soul-sucking as it can be to live in an all-digital world, the internet has made filing taxes a whole lot easier. Even freelancers can take advantage of the sophisticated software from companies like TurboTax or H&R Block, which are both low-cost and easy.

But here are a few times hiring professional help is well worth the money.

1. You have a W-2 job (or three) alongside your freelance business.

Because working a traditional job means you’ve already contributed some of what you owe for Social Security and Medicare, it can complicate your self-employment return substantially — and that’s doubly true if you’re holding down several gigs to make ends meet. (Hey, we’ve all been there.)

An accountant can help you work out exactly how much you actually owe, which can end up saving you money, even after you factor in their charges.

2. You’ve elected a more convoluted business structure, such as an LLC with the S-selection.

While most freelancers operate as sole proprietorships, there can be benefits to incorporating a growing freelance business. For instance, some independent contractors form an LLC and take the S-corporation option, in which you hire yourself through the business as an employee and pay regular income taxes.

It’s known as a “pass-through” taxation structure, and among other paperwork oddities, it means you’ll file a W-2 as both employee and employer. But it’s essential to hire an accountant before you go this route to make sure you follow the IRS rules and that it will actually save you money.

3. You just don’t want to deal with it.

Many accountants charge a few hundred dollars to make the tax man happy. This is money well spent. For freelancers. For everyone.

Although independent contractor taxes are significantly more complex than for those who work a traditional job, it’s hard to compete with the freedom and flexibility of the freelance lifestyle.

Jamie Cattanach’s work has been featured at Fodor’s, Yahoo, SELF, The Huffington Post, The Motley Fool, Roads & Kingdoms and other outlets. Learn more at www.jamiecattanach.com.


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