As a freelancer, you get to be in charge of everything. When you work! Where you work! Who your clients are! Tax withholding throughout the year!
Wait. That last one doesn’t sound so fun.
It may not be fun, but it’s important. Taxes are a bit more complicated when you’re a freelancer, and you may have heard about freelancers filing taxes throughout the year instead of on tax day.
So which is it? Do you file your taxes quarterly, or in April?
The answer is...both!
Probably not what you wanted to hear, right? But here’s why that’s the case.
Why freelancers pay taxes quarterly
Maybe you used to be an employee somewhere, or maybe you’ve been lucky enough to be a freelancer for your whole career. Either way, here’s a quick primer on how a paycheck works.
You get paid a certain amount each month, twice a month, every two weeks, or however your workplace handles it. But this amount doesn’t match up with whatever your salary is, because your employer will automatically withhold a certain amount for taxes.
The IRS works on a rolling basis with this withheld money, so they don’t like freelancers paying it all just once. As something of a compromise (so they don’t have to file taxes each time they get payment for a job), freelancers pay estimated taxes quarterly. The exact statement of the IRS says that "As a self-employed individual, generally you are required to file an annual return and pay estimated tax quarterly."
Wondering if you need to pay estimated tax? The handy flowchart courtesy of the IRS will tell you:
Estimated tax includes income tax (just like normal taxes do), but it also includes a self-employment, or SE, tax.
The SE tax essentially covers two of the line items in paycheck withholding: Social Security tax and Medicare tax. Again, salaried workers are paying those, too, but it’s done automatically. Freelancers just have to do it by hand.
Since the IRS loves their forms, there’s one specifically for calculating and paying your estimated tax. Form 1040-ES is similar to a lot of other tax forms in that you fill out various fields, subtract and add a few of them up, and come up with your owed tax amount.
The real difference between the estimated tax form and other tax forms is that in order to file your estimated taxes, you need your estimated gross income, as stated on the first line of this worksheet. The IRS suggests using the previous year’s income as a starting place and estimating up or down as appropriate. It’s good to err on the side of caution and overestimate how much you’ll make so you can get a refund at the end of the year; if you pay too little in taxes, you could face a penalty.
As you’re probably aware when it comes to taxes, the IRS doesn’t really like you to be late on paying them. They’ve been kind enough to release a filing schedule so you know when you have to have your 1040-ES in by.
The first deadline, for the period of January 1 to March 31, is April 15 – easy enough to remember, since that’s the annual tax day in the U.S. Here’s the full schedule:
|Jan 1 - Mar 31||Apr 15|
|Apr 1 - May 31||Jun 15|
|Jun 1 - Aug 31||Sept 15|
|Sept 1 - Dec 31||Jan 15 (next year)|
It’s important that you stick to this schedule. Filing late can come with a hefty fine, and the last thing you want to do is pay more money than necessary.
Paying taxes annually
"Wow, this is great!" you say. "I’m paying my taxes throughout the year, which means I’m off the hook when all of you salaried suckers are sweating it out during tax season!"
Yeah, about that…
Even though you’re paying taxes each quarter, you’re still going to have to fill out some tax forms every April (including the April 15 quarterly tax mentioned earlier).
Basically your quarterly tax payments are you just manually doing what an employer would do with every paycheck – taking out Social Security and Medicare taxes – and now you have to do the "normal" part of filing an annual tax return.
You’ll use a Schedule C form to calculate your income (or loss) from your business, and then fill out a Schedule SE Form 1040 (not to be confused with the aforementioned Form 1040-ES. I know, the IRS, right?) to figure out the SE tax (Social Security and Medicare) that you should have been paid throughout the year now that you have a final tally of your actual income.
And then you’re done! You know, until the next quarter comes around.
So filing taxes every quarter is a pain, especially when you still have to do it annually, but never fear! There are still some pretty cool things you can do, tax-wise, as a freelancer.
Namely, you get to claim a whole lot of deductions.
Now, a lot of people can write off the occasional item here or there. But as a freelancer, you can claim almost anything you use for business as a deduction. Business meals with clients, travel to attend a conference, software, your vehicle: if you’ve used it in your business, there’s a good chance you can write off at least part of the expense.
If you work from home, you can also deduct a lot of the expenses of a home office, including furniture and utilities.
So don’t fret come tax season, freelancers. You still have perks you can take advantage of – and you still get to be your own boss.