8 Tax Tips for Freelancers and Independent Contractors

When you work as a freelancer or independent contractor, you're your own boss. This means you set your own rules and choose the work you want to do at your own pace. That independence can be exhilarating, but the added tax responsibilities can be stifling without the right plan or insights. Freelancers and independent contractors don't typically budget for affordable professional accounting services when they begin operation, but they should. The income tax filing process differs from what you were used to as a W-2 employee, which involves following complicated rules and filing numerous forms. And if you miscalculate or miss a deadline, you could invite penalties and Internal Revenue Service (IRS) scrutiny. Use this great guide to learn about essential tax tips for your independent contractor or freelance business income. 

8 Tax Tips for Freelancers and Independent Contractors

Use this tax tips for freelancers and independent contractors guide for critical insights into your tax responsibilities as a self-employed individual. 

Budget for Taxes      

Employers withhold a portion of employee wages to fulfill various tax obligations, such as those associated with Social Security and Medicare. Unlike employees, you will need to withhold taxes for the freelance or independent contractor income you receive, but determining the precise amount to withhold can be a challenge. Freelance and independent contract income isn't usually consistent like a W-2 employee's paycheck. There will likely be more prosperous periods than others, which could happen for several reasons, such as seasonality. If your freelance or independent contract business is at peak operation in the summer, chances are you'll have less revenue once summer ends and demand cools. These types of income fluctuations should be accounted for when budgeting for your freelance or independent contractor taxes. You'll be responsible for the 15.3% self-employment tax and quarterly estimated taxes, which must be calculated and paid four times per year. 

Get Your IRS Forms in Order

Your entity structure will determine the IRS forms you'll file for your freelance or independent contractor business. If you haven't selected a business entity, sole proprietorship is your default entity structure. If you're formed as a sole proprietorship or single-member LLC, attach Schedule C to your IRS Form 1040, Individual Income Tax Return. For quarterly estimates, use IRS Form 1040-ES, Estimated Tax for Individuals. Other entity types require a business return filed separately from your tax form. If this applies to your freelance or independent contractor business, use one of the following forms:

Keep Track of Your Income

Bookkeeping allows you to keep your freelance or independent contractor income organized. By keeping accurate financial records and monitoring your cash flow, you're able to address problems more efficiently and prove your eligibility for lines of credit. Keeping track of expenses, income, and invoices saves time and makes things easier when a deadline approaches, such as your next quarterly estimated tax payment. Bookkeeping is also helpful when you need to collect payment for your services. If you're behind on your books, don't worry! 1-800Accountant offers robust catch-up bookkeeping services that will catch your books up even if they're years behind!   

Figure out Deductions and Write-Offs

Many business expenses related to your freelance or independent contractor operations qualify as tax deductions, reducing your taxable income. Qualified business tax deductions are ordinary (i.e., not excessive) and necessary for running your business. Common business tax deductions you may be able to take advantage of include the following:

Track your spending throughout the year by monitoring your bank statements and credit card bills. This way, you can maximize your deductions to reduce your taxable income and tax bill.

Make the Most of Tax Credits

The most common way to minimize your tax liability for your freelance or independent contractor business is to take advantage of the numerous tax deductions available. However, there are tax credits available as well. A tax deduction or tax write-off differs from a tax credit. Tax credits reduce the amount of tax you owe directly, whereas deductions reduce your taxable freelance or independent contractor income.

Calculate Taxes

Self-Employment Taxes

Freelancers and independent contractors pay a self-employment tax of 15.3%, regardless of their income tax bracket. Self-employment tax represents 12.4% of Social Security and 2.9% of Medicare taxes.A traditional employee who receives a bi-weekly paycheck is taken care of by their employer. The employer withholds Social Security (6.2%) and Medicare (1.45%) taxes from the employee each pay cycle and pays an equal portion. The employee and employer split the 15.3% of Social Security and Medicare taxes on the employee’s wages.

Income Tax

You can calculate your freelance or independent contractor tax liability in two steps. 

Step 1: Calculate your business taxable income. Total your freelance income, then subtract your business tax deductions.

Step 2: Calculate your business tax liability. Multiply your taxable income by your income tax rate. Add the self-employment tax to find your total tax liability.

You can follow this approach to calculate your quarterly estimated taxes and your business tax return. 

Pay Estimated Taxes Quarterly

Submit payment by the deadline after accurately calculating your quarterly estimated tax payment using the two-step method detailed above. Freelancers and independent contractors will typically pay the IRS electronically or by mailing payments. Deadlines for quarterly taxes for 2024: 

File Taxes

Once your taxes are prepared, file them with the appropriate state and federal authorities. Typically, these materials may be filed electronically or by mail, giving you the flexibility you need as you continue building your freelance or independent contractor business. 

Should You Hire an Accountant for Freelancers?

Consider these top reasons if you're wondering whether to hire a tax professional for your freelance or independent contractor business. 

1. Accountants can prepare your financial statements. As a freelancer or independent contractor, you may have the information you need to begin the income reporting process. However, you likely don't have everything you need to prepare your financial statements. Working with an accountant will help you report your freelance income accurately.

2. Your certified public accountant (CPA) can check your balance sheet, cash flow statement, and income statement. They will use your financial statement to provide a more detailed overview of the transactions you'll need to file your taxes and report income.

3.Your CPA can prepare tax returns for individuals and small businesses, which is helpful for freelancers and independent contractors who can operate their businesses as sole proprietors.

4. CPAs can advise or represent you if your tax return triggers an audit. Your CPA can work with the IRS to resolve what the IRS requests during an audit.

5. Working with an accountant or CPA is a sure way to save time. The familiarity with tax regulations and the knowledge of tax credits and deductions will help you maximize your tax savings. 

What an Accountant Can Do for You

An accountant can perform many high-level services for your freelance or independent contractor business, including the following:

Questions to Ask When Hiring a Business or Personal Accountant

Hiring an accountant to address the financial work for your freelance or independent contractor business is a great idea. Before you select an accountant, consider asking these questions to learn more about what they can do for you. 

1. Can you represent me if I get audited by the IRS?
2. Do you communicate by email or other means of communication online?
3. Do you have experience with my industry?
4. How often should we meet to discuss my business taxes?
5. What are your fees?
6. What services do you provide?

These questions will help you better understand each prospect and how they'll handle your financial information.

Freelancer and Contractor Tax FAQs

When should freelancers and independent contractors pay taxes?

Unlike W-2 employees, freelancers and independent contractors will pay taxes several times per year to fulfill their obligations, including quarterly estimated taxes. Unless a date falls on a weekend or holiday, quarterly payments are due April 15th, June 15th, September 15th, and January 15th.

What federal taxes do they pay? The taxes freelancers and independent contractors pay federally depend on numerous factors, including the business entity they're formed as. If a freelancer or independent contractor declines to select an entity, they will default to a sole proprietorship.

What state taxes do they pay? The state taxes freelancers and independent contractors pay will vary by region and other factors, including the entity they've selected to form their business as.

What tax breaks could I be eligible for? Certain expenses, including advertising, training, and business meals, qualify as tax deductions, which reduces the taxable income of freelancers and independent contractors. These tax deductions must be ordinary (i.e., not excessive) and necessary for running your business.

What will happen if I miss a deadline? If you miss a deadline, the first thing to do is submit pertinent forms and payments to the IRS immediately. IRS penalties will continue to accrue until you've submitted your materials.

What if I make a mistake in the forms? If you make a mistake on a form, you can file an amended return with the IRS to address any issues. The rules for filing an amended return with the IRS are relatively straightforward.

What if I miscalculated income or taxes? Miscalculating a quarterly estimated tax payment, leading to an underpayment, is a common mistake made by freelancers and independent contractors. The IRS can issue an underpayment penalty that's usually 5% – 25% of the underpayment amount.

What will happen if I don’t pay my taxes? Failure to pay your small business taxes will result in penalties and increased IRS scrutiny. Freelancers and independent contractors who wish to remain in operation should make every effort to fulfill their state and federal tax obligations.  

Work With a CPA That Specializes in Freelance Finances

Staying on top of your independent contractor or freelance taxes can feel like another full-time job as your business matures. There are many moving parts, and making the best decisions to minimize your tax burden can be dizzying. That's why freelancers. independent contractors, and small business owners in a diversity of industries trust 1-800Accountant, America’s leading virtual accounting firm, with their financial work. Whether it's bookkeeping, tax preparation, quarterly estimated taxes, or any of our professional accounting services, we have the affordable solutions you need to ensure your freelance or independent contractor business remains compliant. Schedule a quick consultation–usually 30 minutes or less to learn more.