I have a friend who’s currently starting a consulting business and wading into the self-employment waters for the first time. While she’s focusing on data management, not writing, the tax stuff is largely the same, and having been self-employed for several years now, I offered to give her a quick rundown of how doing your taxes as a self-employed person works.
When I posted a silly tweet about having sent a friend a 600-word “intro to taxes as a freelancer” email, so many people replied OMG I NEED THAT TOO that, well, I decided I’d just post it here. So here’s a slightly edited version of what I sent her.
DISCLAIMER: I am not a tax professional or CPA or anything like that — this is all what I’ve figured out on my own. You should not rely on this without doing your own research or seeking additional guidance, and if you screw up your taxes, I am definitely not responsible! Also, obviously this only applies to the U.S. I have no idea how this stuff works in other countries.
Rebecca’s Quick and Dirty Guide to Taxes for Self-Employed People
- Depending on the state you live in and how much you expect to make, you may or may not need to get a state business license and/or file special state taxes. I live in Washington state, need a Washington business licence, and file a state excise tax return; the friend I originally wrote this for, who lives in Mississippi, does not.
- Anyone who pays you more than $600 in a year needs to file a 1099 declaring that to the IRS at the end of the year, similar the W2s that employers file (https://www.irs.gov/forms-pubs/about-form-1099misc). It isn’t really your responsibility to make sure this happens, but if someone is paying you over $600 (even spread across multiple jobs over the course of the year) and you think they might not have dealt with this before, it might be nice to give them a gentle nudge.
- For clients who pay you less than $600 over the course of the year, the IRS won’t really have any way of knowing about it… but technically you’re still required to report in on your taxes. Start keeping detailed records of your freelance income, like a spreadsheet with the date, amount, and client name.
- And track your expenses as well as your income! If you buy anything for your freelance work — a new computer, software, business cards, the hosting fee for your website, whatever — or do any traveling or professional development for it, anything like that, that’s a business expense and can be deducted from your freelance income (that is, you don’t pay taxes on that bit of your income). Again, just keep good records, and keep all your receipts.
- Part one of paying self employment taxes is, making quarterly estimated tax payments. The tricky thing here is that you have to make your best guess at the beginning of the year of what you think your income will be during that year. Here’s the information page for that on the IRS website, with links to the form you use to calculate how much these payments should be, when they’re due (note it’s not actually every three months), etc.: https://www.irs.gov/businesses/small-businesses-self-employed/estimated-taxes. And you can make the payments online here: https://www.irs.gov/payments/direct-pay. Note that if your freelance income is pretty small, you might not have to make quarterly payments at all! You’ll just have to do the math and see.
- Part two is filing Schedule C (https://www.irs.gov/forms-pubs/schedule-c-form-1040-profit-or-loss-from-business) when you do your tax return after the end of the year. (No more 1040-EZ for you!) Note that freelance income is taxed at higher a rate than employment income (because you pay both regular income tax and self employment tax on it). Think of it like you’re covering the payroll taxes etc. that would normally be covered by an employer. If you’ve been keeping good records of all your business-related transactions, you’ll be ready to fill out the form when the time comes. (Also, because you’re paying more taxes and covering all your own overhead and whatnot, you normally charge a higher hourly rate as a freelancer/contractor than what you would expect to be paid to do the same work as an employee. Twenty percent higher is totally reasonable.)
- At least to start with, you don’t necessarily need a separate bank account for business stuff. I use my regular checking account for everything, and just have a giant multi-tab spreadsheet with all my business record-keeping. If you’re wildly successful, you may eventually decide that you want to incorporate your business and become an LLC (limited liability corporation) instead of a sole proprietorship, and at that point the business would be a separate entity from you that would need its own bank accounts etc. (and would have the business equivalent of a Social Security Number, which is an Employer Identification Number or EIN). The advantage of this is that if someone sues you over something business related, they can only go after the business’s assets, not your personal assets. I have not done this, and it doesn’t seem to be common for freelance writers, but it’s good to at least know that it’s an option.
And that’s it! Good luck, fellow freelancer, and whatever you do, don’t forget about those quarterly tax payments.