Your work as a freelancer may look different than the vast majority of American workers, but you are subject to the same taxes they are. In fact, since you are both a business and a worker, you will typically pay more to cover both personal and business taxes.
We know that doesn’t seem fair, but it’s not all bad news. Your business status also entitles you to more deductions than the average worker, which we’ll get into in a later chapter.
If you don’t pay the taxes you owe as a freelancer or don’t pay them by the April 15th deadline, you will also have to pay late fees and interest on your outstanding balance.
Since no one wants to pay extra tax costs, we’ll help you understand which taxes you need to worry about and why they apply to you and your business.
Before we jump into reporting, let’s first clarify what the government considers taxable income.
Income is everything you’ve made between January 1st and December 31st. Period. Whether you’ve made $60 or $60,000, you must report and pay taxes on this money.
You may be saying, “Wait, I thought you only had to pay taxes on payments of $600 or more.” Unfortunately, this is a common misconception. While your client only has to file a 1099 form if they pay you more than $600 for work throughout the year, you are responsible to claim any and all income on your tax return.
Bonuses, tips, gift cards, and even bartering are also considered income by the IRS. If you create a website for a mechanic in exchange for work on your car, for example, you will have to report the amount you would have charged them under normal circumstances.
Many freelancers have multiple businesses that provide their own stream of income, such as starting a podcast or offering different types of work. If you have multiple registered businesses, you will need to file separate Schedule C forms (more on those later) for each business.
You will still file this income under your personal filing, but it will require a bit more paperwork.
As a freelancer, there are several types of tax you may have to pay on your income, including:
Every independent contractor has to pay self-employment and federal income taxes, but you may not have to pay the other types. We’ll help you understand each tax and how to determine if you’re responsible for them below.
As a business owner, you pay taxes for both yourself and your business. If you were an employee, these taxes would be paid by your boss, the company’s owner. Since you are now both of those things, the responsibility falls to you.
In 2021, the self-employment tax rate was 15.3%. This amount covers the social security and medicare taxes that every American worker and business is required to pay out of their earnings.
Typically, businesses take these taxes out of their employees’ paychecks for them. As a self-employed person, however, you will have to add this amount to the other taxes you pay.
In the U.S., the amount you make annually determines what percentage of your income you will have to pay in taxes. The less you make, the less you will have to pay. The more you make, the more you have to pay.
The IRS has created seven tax brackets (you can almost think of them as income levels), each with its own tax rate. These rates only apply to the chunks of income that fall within the range assigned to that bracket.
For example, let’s say you make $55,000 in taxable income and are a single filer. Using the chart below, we can see that you are subject to the rates for the first three brackets. You would pay:
In total, your federal income tax amount would be $7,849. You would then add this amount to the other taxes you owe.
Some states also charge their own income taxes. The amount you owe and how you have to file and pay these taxes is determined by the state, so check for your state’s requirements.
Some, but very few, cities, countries, school districts, or other municipalities charge their own income taxes. Check your local government resources for these taxes.
While you are likely used to paying sales tax, you may not be familiar with charging it. States determine their own rates and rules for what qualifies as a taxable sale. Some states don’t even have a sales tax.
If you are offering a service, such as graphic design, car washing, or grant writing, you typically don’t need to charge or pay sales tax on these items.
If you are selling a product, such as a t-shirt or artwork, you will need to charge your customers sales tax or pay it on your own. You may also need to charge sales tax for any software you sell, though taxes on digital products can be tricky.
We recommend checking your state’s requirements or speaking with a certified tax expert to make sure you meet all of your tax responsibilities.