Taxes for freelancers
Taxes for freelancers can feel confusing. Get yours squared away from day one, and you’ll be sitting pretty come April 15th.
Of all the unpaid labor you have to do as a freelancer, few are more confounding than getting your taxes set up. When I first started freelancing, I did so on the wing of a prayer which, for the daughter of someone who worked his whole life in banking compliance, is more than a little shameful. And believe me, the IRS took note.
After getting that proverbial slap in the face, I decided I needed to get on the right side of the tax man and eventually discovered it wasn’t actually that hard to keep things in line. When you work as a salaried employee, all it takes is filling out that blissfully easy W-4 and sending it right back to the company. If you make more than $400 from a side gig or a contract, however, you’re going to need to claim that on your taxes all on your own. The IRS does have a self-employed tax center that lays out everything you need, but let’s break it down here in some easier-to understand terms.
Getting paid
Let’s start with the important part: getting that sweet, sweet money. Once you’ve come to an agreement on how much you will be paid, you need to confirm how that will be taxed. As a contractor, you will almost always be classified as a 1099 employee, which means that you’re responsible for paying the taxes on the money you make; the company you work with will not be doing that.
Every contract you work with should provide you with a 1099-NEC form upon completion of the agreed upon work. This form states what the company paid you, and is sent to the IRS. Fight the temptation to file it away for another day, because if there’s one thing the IRS looks for, it’s money they’re owed. Stick it with your tax documents and make sure it gets filed at tax time.
Paying the man
There are two parts to this that need to be addressed. The first one is how you file your self-employment tax, and the other is how and when to pay the taxes you owe.
For starters, let’s look at the Schedule SE form. This form is basically what you have to pay for Medicare and Social Security. Since those are things an employer usually pays into, it’s an added responsibility on your part as a contractor. For the most part, when you hear someone refer to “self-employment tax”, this is what they mean, not actual individual income taxes.
When it comes to paying the amount required, there are two ways to do it: quarterly and lump. If you expect to be making more than around $1,000 a quarter, you will want to go the route of making quarterly payments. This not only saves you from having a big “WTF, I owe HOW much?!” moment come April, but also avoids the penalty fees that come with it. You’ll need Form 1040-ES if you do pay your taxes quarterly. If, however, you like to stack that fat cash in your account and pay it all at once, based on what you were able to deduct, you may want to wait and make one large payment when you submit your taxes.
Deductions and filing at tax time
Speaking of profits and losses, the Schedule C form will be your new BFF. This is where you submit the actual costs of doing business: advertising, software purchases, your home office, mileage to meet clients, etc. If you’re finding yourself wondering what to keep track of from Day 1, this form has your comprehensive list. When people say “Oh, I can just write that off,” this is where they do that, so save every relevant receipt, write down every mile driven for work, and keep as much of your tax money as possible.
You will need both the Schedule C and the Schedule SE to use with your 1040 Form, which is probably the one tax form most people are familiar with. Filling out those first two forms correctly will make this one a breeze. Make sure you submit ALL of them together.
Retirement plans and pay-ins
As a bonus, let’s also talk about retirement plans, because there’s a common misconception that not having an employer means not having a 401K, and there are some obvious tax benefits to paying into those.
The two most popular options are going to be a Solo 401(k) and a SEP IRA. The important distinction for the Solo 401(k) is that you have to be a sole proprietor. If you have any employees working for you, this option is off the table. Luckily for most freelancers, this isn’t an issue. What you DO need to do this is an Employer Identification Number (EIN), which you can get by forming an LLC.
As far as the Simplified Employee Pension (SEP) IRA is concerned, you can have a few employees working under you and still qualify for this plan, but it’s just as easy to contribute as someone who is self-employed. The tax deductions work the same way they do for a traditional IRA, and you’re not tied to paying into it every month the way you are with a 401(k).
Wrapping up
I hope I’ve made it a little less daunting to dive into your personal taxes. The obvious disclaimer here is that I am a writer, recovering developer, and Googling enthusiast, NOT an accountant. While these steps should make it easier for you to file your taxes, if you have any questions or doubts about doing it right, you should most definitely contact a CPA. Once I did that, I was able to see what was needed for the following year, meaning I paid someone once, saw what I did right and wrong, and was able to correctly do taxes for freelancing in the future all on my own. You’ll also have a different experience if you’re living internationally, and should definitely seek out the advice of a trained professional.
Regardless of the route you take, with a couple years of experience, this will all turn into old hat for you. So get that contract, pay your taxes, and stay outta trouble.
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