While traditional employers take taxes out of their workers’ paychecks, freelancers—or those who operate a trade or business as a sole proprietor or an independent contractor—are responsible for their own taxes. Not only are you required to submit four individual IRS tax forms, but you must also assess your own tax burden by determining what can and can’t be legally deducted.
Paying taxes as a freelancer can be complex, but not beyond your grasp. Below are the four tax forms freelancers need to file along with tips for doing so successfully.
1. Form 1099-MISC
Salaried workers usually don’t have to worry about reporting their earnings, as the companies that employ them usually do it. As a freelancer, however, you should receive Form 1099-MISC from each client for whom you provide services exceeding $600 throughout the year.
Your client reports these earnings to the IRS, and you must do the same as part of your own annual filing. Clients must send you last year’s 1099-MISC forms by January 31, and send them to the IRS and state tax department by April 15. Failing to submit all 1099 forms on time can result in penalties, as can under-reporting your earnings.
Even if you don’t receive Form 1099-MISC and were paid $600 or more by the client, you still need to pay taxes on the money you earn. In the meantime, request the Form 1099-MISC from your client. If your client can’t provide a timely response or valid reason for the form’s absence, call the IRS at 1-800-829-1040 for assistance.
2. Form 1040 Schedule C
Once you receive all your 1099 forms, you can record the total income on Form 1040 Schedule C. Along with allowing sole proprietors and self-employed persons to report their profits, a Schedule C form enables them to list losses suffered during the business year. This is the form where you can specify any possible deductions. The IRS will then use this information to determine your federal, state and self-employment tax burden.
Form 1040 Schedule C is divided into five parts. In the first part, you will list all income from customers and clients, and use this information to determine your gross profit and income. For the second section, you will list all of your business expenses, then subtract them from your gross income to determine a net profit or loss. This portion accounts for all “ordinary and necessary” expenses including rent, utilities and advertising that the freelancer incurs.
Typically, parts three through five of Schedule C must only be completed if your business requires the purchase of inventory. Self-employed persons should be sure to send in their Schedule C forms by April 15 as part of their annual tax return, though they may be required to submit estimated tax payments each quarter to avoid penalties.
3. Form 1040-ES
If you plan to make enough money to owe at least $1,000 in taxes for the year, you will likely have to pay quarterly taxes. Due four times a year, Form 1040-ES is the form that sole proprietors and freelancers use to submit estimated tax payments to the IRS. In order to complete this form, you will first need to determine your annual earnings. You can then estimate the value of expenses and deductions to assess how much you should pay.
In order to calculate your tax payment accurately, start by reviewing last year’s federal tax return. You may need to adjust your estimate based on your work hours and rates for the current year. Don’t worry about submitting too much in these quarterly payments—if you owe less than you paid at the end of the year, you will receive a refund from the IRS.
To avoid penalties and late fees, be sure to submit 1040-ES forms with the appropriate payments by April 15th, June 15th, September 15th, and January 15th.
4. Form 1040 Schedule SE
Schedule SE is for computing your self-employment tax, which is your payments to social security, medicare and the federal government. In a conventional company-employee relationship, the company pays 7.5% of a workers’ contributions to these entitlements in the form of a payroll tax. As a self-employed person, you must pay the employer’s portion in addition to the portion you would normally owe as a regular employee. If you make more than $400 a year, must pay self-employment taxes on Form 1040 Schedule SE.
Schedule SE is filed with your annual tax return on April 15. It’s important to remember that the IRS permits you to deduct half of your SE tax amount from your total taxable income. Take advantage of all possible deductions so you don’t end up paying more than your fair share.
There are a number of stresses associated with freelancing, but paying taxes shouldn’t be one of them. Keep up-to-date on the latest tax guidelines to avoid penalties and keep your business in good standing. And use tax-preparation software to simplify the process and avoid mistakes that can lead to an audit.
For an in-depth article on the entire tax-filing process, check out our complete guide to taxes for the self-employed.