A Basic Guide to Taxes for Freelancers
An increasing number of Americans have left the corporate world entirely or are supplementing their income by freelancing. There are many types of freelance work, but it’s important to know the tax obligations. We’ve assembled the most important information you need to know as you move forward. Be sure to refer back to this page frequently, and if you have any questions, contact our office.
Any income you earn is taxable and must be reported on your tax form. When the work you perform for a client totals $600 or more, the client must prepare a 1099-NEC form and submit a copy to you and the IRS. When an individual client pays you less than $600, you are still required to report that income, but the client is not required to send the form. However, some employers under pressure from state Employment Development Departments may classify you as an employee, withhold taxes and issue you a W-2. In that case, the income is not treated as freelance work, and any expenses associated with W-2 income are not tax deductible.
You can minimize your tax obligation with the expenses you report on Schedule C of your tax return. Freelancers and self-employed individuals are expected to list their income and business-related expenses on Schedule C of their income tax return. Typical freelance writer expenses include the cost of office supplies such as printer paper and ink; the internet charges they pay; the cost of technology such as a laptop, fax machine, printer, or copier; any expenses for mileage or business meals; software; subscriptions. Anything considered a cost of doing business can be deducted from the income that your business earns, reducing your tax liability. To ensure that you are maximizing your business deductions, keep careful track of every expense and keep all receipts.
If you work from home, you may be entitled to a home office deduction. If your workspace is located in your home, you can take a deduction for the percentage of your home that is dedicated to your business. There are two different ways of doing this: you can either calculate the percentage of your home that is used for work based on its total square footage and then deduct that percentage of home costs such as mortgage principal or rent, utilities, and insurance, or you can choose to take the simplified (safe harbor) deduction of $5 per square foot (maximum $1,500). It is important that if you choose to calculate the percentage of your home used, you only use the area for work purposes. Sitting at your kitchen counter will not allow you to calculate the kitchen space for business purposes, as it is also used for other things.
You can deduct the cost of your health insurance. If your sole source of income is freelancing, then you are probably paying for your health insurance. That represents a significant amount of money, and that’s why the government allows you to claim the full cost of your premiums as a deduction. That is not only true for your coverage —you can also deduct the costs for covering your dependents and your spouse as long as the policy is in either your business name or your name. This gets reported on the first page of your tax return as an adjustment to your income rather than being listed as a business expense on Schedule C or an itemized deduction on Schedule A.
You are required to pay self-employment tax on your freelance income. While W-2 employees do not need to worry about their Social Security and Medicare taxes because their employers withhold them, self-employed individuals are required to calculate the percentage of their income that they owe and submit it to the government themselves when they pay their taxes. Self-employment tax is calculated for the 2021 tax year as 15.3 percent of net income, which means the figure that reflects any deductions you listed based on your Schedule C and any other adjustments. This amount feels like a lot, but half of it gets deducted when you review the calculations on your tax return's first page.
If you earn royalties on anything you self-published, you must report it on your Schedule C. Writing often results in royalty payments being sent by the publisher, and at the end of the year, they must send you 1099-NEC forms reflecting that income. That form will also be sent to the government. If what you self-published costs you more than you earned, then you will be able to report your losses and use them to reduce your overall income, thus cutting the amount of taxes you will owe.
If you work as a freelancer while also employed, only your freelance income gets reported on Schedule C. Your tax liability for self-employment only applies to the money you earn as a freelancer. Income earned from an employer will be withheld by them and reported on a W-2 form.