How to Navigate Freelancer Taxes

Taxes can feel like an overwhelming aspect of freelancing. We’ll cover the basics of freelancer taxes, including how much to save for taxes and how to get help with filing them, so worrying about them becomes a thing of the past.

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In comparison to traditional work, filing taxes as a freelancer will look quite different. If you’re already picturing the IRS showing up on your doorstep to whisk you away for tax fraud, we’re here to help.

Freelancer taxes, while different, aren’t as confusing as they’re often made out to be. While you will file a different tax return form than usual, it’s fairly simple once you understand the basics.

Here’s what you need to know about freelancer taxes and how to file them.

Disclaimer: This piece is for educational purposes only and should not be taken as financial advice. Please consult a tax professional for personalized tax recommendations. 

Do I Need to Pay Tax on Freelance Work?

As a freelancer, you are technically considered self-employed. Thus, you are subject to self-employment taxes on top of regular income tax.

In 2021, self-employment tax was 15.3%, which covers your contributions to both Social Security and Medicare taxes. In a traditional role, this tax is taken out of your paycheck automatically. However, as a freelancer, you’ll have to withhold this tax on your own.

What You Can Write Off as a Business Expense

One of the benefits of filing taxes as a freelancer is that you can write off business expenses. Now, this doesn’t mean you can write off your entire shopping spree because you bought one pair of professional-looking pants. But it does mean that you can take tax deductions for reasonable expenses related to your business, such as:

  • Educational courses
  • Required equipment
  • Office supplies
  • Software
  • Business-related food

You will need to provide proof of these expenses and be able to justify why they were relevant to your work.

How to Actually File Freelancer Taxes

Let’s recap. In a traditional role, taxes are automatically taken out of each paycheck. As a freelancer, however, you’re responsible for withholding and paying taxes on your own.

So, if taxes aren’t taken out of each paycheck automatically, how do you make sure you have enough to pay freelancer taxes? You have to be proactive and save.

How Much to Save for Freelancer Taxes

It is recommended that freelancers save around 30% of their income for taxes. So, if you made $1,000 on a freelance project, you’d want to save $300 for taxes. While your tax payment might not end up being that whole 30%, it gives you a sense of security knowing that 30% savings should cover you.

We recommend sitting down at least once a month to set aside money for taxes. Simply calculate your gross income, then deduct 30%. Some freelancers choose to transfer the tax savings to another account so they aren’t tempted to use it. Other freelancers choose to rely on their memory to know how much in their checking account is spending money and how much is tax savings. (We recommend the former.)

If saving for taxes on your own seems stressful or challenging to manage, we recommend getting set up with Catch. Catch is a portable benefits platform that helps freelancers manage taxes and get access to benefits. By integrating with your bank, Catch can help you automatically save for freelancer taxes right from your smartphone. 

Filing Freelancer Tax Forms: A 1099

In a traditional role, you’d receive a single W-2 form from your employer to file taxes. As a freelancer, however, you’ll need to file a 1099 form to do your tax return. A 1099 form shows the IRS the different types of payments you’ve received from individuals or businesses that are not your employer.

What does that actually mean? As a freelancer, you are considered self-employed, and your clients pay you for a service that you provide. As a result, you will likely have been paid by various different clients. So, a 1099 form essentially summarizes those payments to show the IRS how you made money.

To actually file the 1099 form, you can utilize tax preparation software such as TurboTax or consult with a certified tax accountant.

Where to Find a 1099

If you freelance on Pangea, we will send you a 1099 form already filled out and ready for you to submit to the IRS. If you have clients that you did not source via Pangea, you will need to obtain a 1099 form from each client that paid you over $600, then submit each 1099 individually.

There are a few different 1099 forms, each with a different purpose:

  • 1099-MISC: For miscellaneous income
  • 1099-K: For transactions from third-party payment platforms, such as PayPal and Venmo
  • 1099-NEC: For independent contractor income (the one you’ll use to do your tax return!)

You can find all 1099 forms on the IRS website.

Paying What You Owe in Freelancer Taxes

With a traditional job, you may be used to receiving a tax refund. While getting that lump sum of cash in your bank account feels great, that likely won’t be the same for your freelance work.

Because you haven’t paid taxes on your income yet, you will likely owe money to the IRS after submitting your 1099(s). Now, don’t panic. This is perfectly normal and exactly why you have 30% of your income in savings.

Now is the time to dip into that 30% to pay what you owe in freelancer taxes.

Note: You may not end up owing the entire 30% that you saved depending on the tax deductions you take. However, you should still save 30% of your gross income for taxes regardless. If you end up not owing the entire 30%, then consider the leftover savings a bonus. However, it’s better to be prepared to pay the entire 30% than be stuck with not enough money to pay your taxes.

Final Thoughts

Freelancer taxes can seem challenging to navigate. The most important thing to remember is to always save 30% of your freelance income. Saving 30% upfront will protect you from not having enough to pay your freelancer taxes come tax season. 

If you need help saving for taxes as a freelancer, sign up with Catch.

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