6 Top Tax Tips for Freelancers

6 Top Tax Tips for Freelancers

by Greg Lindberg, January 2016

Freelancers come in all shapes and sizes. From freelance writers who craft compelling marketing materials, to chefs who create delicious dinners, to artists who paint beautiful portraits, the life of a freelancer can span far and wide.

But one common denominator is what freelancers can do to stay IRS-compliant while also saving money. Consider these tax tips for freelancers:

1. Report all relevant income when filing your taxes.

Many freelancers who get paid by the project or who receive cash payments think they don't have to report all of this income to Uncle Sam. If you've heard this faulty tax advice in the past, it's time to play by the rules.

It is imperative to report all freelance income you earn over $600 when filing your taxes to help avoid a potential audit. Being honest is always the best policy when dealing with the IRS.

2. Be aware of your freelance tax-filing requirements and deadlines.

Taxes for freelancers involve unique IRS filing requirements and additional deadlines to put on your calendar. If you work as a freelancer, you should receive a Form 1099-MISC tax form from any employers or clients for which you perform contract work and earn at least $600. You should receive this form by early February. The 1099 should include all income you earned within a given tax year from an employer.

Freelancers must report this income on their personal Form 1040 tax return under Schedule C when filing taxes with the IRS. Because Schedule C income has not had income taxes deducted, freelancers are responsible for paying quarterly estimated taxes throughout the year. These payments are due on January 15, April 15, June 15, and September 15. To avoid possible penalties at tax-filing time, use Form 1040-ES to pay your estimated taxes each quarter.

3. Don't forget self-employment taxes.

Freelancers who earn at least $400 annually through 1099 contract work are required to pay self-employment tax on the income they earn. The self-employment tax covers Social Security and Medicare taxes, which employers typically withhold from the paychecks of their W-2 employees.

In most cases, the amount you earn that is subject to self-employed taxes is 92.35% of your net earnings through freelance work or business ownership. Net earnings are calculated by subtracting ordinary and necessary trade or business expenses from the gross income you earn.

4. Claim all eligible deductions for freelancers.

If you've been looking for tax help on how to reduce your freelance taxes, look no further than the numerous freelance tax deductions for which you may qualify:

  • The home office deduction, which allows freelancers to write off the expenses of the space they use in their homes to conduct their trade
  • The vehicle deduction—either claiming miles driven or actual vehicle expenses for work-related travel
  • A 50% write-off on work-related meals and entertainment
  • Industry-specific items you may need, like certain tools for an electrician or graphics software for web designers.

5. Keep solid financial records and receipts.

One of the most important tax tips for self-employed professionals who do freelancing work is to keep solid records. Tax-saving tips are only good if you've got the proper documentation to prove your income, expenses, and write-offs.

The IRS is notorious for closely examining the tax returns of Schedule C filers, so it's critical to document every detail of your financial activities. Keep a spreadsheet of all income you've earned, when a client pays you, and what the freelance job was.

Use a mileage log or download a handy smartphone app to record any driving you do for freelance jobs. Save receipts in an organized file, and scan them for easy access.

6. Consider incorporating.

Perhaps you conduct a good amount of freelance work as a business consultant for several high-profile clients. Rather than continuing to work as a sole proprietor, consider establishing a formal business entity under which you can do all of your work as a freelancer. Incorporating offers protection through limited liability, as well as providing increased opportunities for tax savings.

If you have questions about your taxes, LegalZoom can help. Sign up for LegalZoom's personal legal plan to get tax advice from a tax professional for a low monthly fee. You'll also receive unlimited 30-minute phone consultations on new legal matters with an attorney, all for one low price.