Freelancing is different for everyone, so filing your taxes might not follow the exact processes we’ve explored in this guide. To help you get a better idea of what you need to do, we’ve used this chapter to answer some of the most common questions about paying taxes as a freelancer.
As with any legal issues, you will get the best answer from a professional who understands your exact situation and needs. Please get in touch with a certified tax professional for more specific questions and assistance with your taxes if you have more questions.
This is a tricky situation. Every state has its own definition of what it means to be doing business within it. In general, if you don’t actively advertise sales in other states or travel to them to do business, you are generally considered to be doing business in your home state. Traveling outside of your state for work makes your taxes more complicated and could lead to needing to file tax returns in more than one state.
This is also tricky. The U.S. has a different tax treaty with each country, so the consequences of doing work in any foreign country should be analyzed in advance. If you need to pay taxes to a foreign country, you will likely have to hire professional tax help within that country to avoid issues.
American citizens and resident aliens must include and pay taxes on all of the money they make globally, which should be reported on their U.S. tax returns. If you also have to pay taxes to another country for the same income you reported to the IRS, you may be able to receive a foreign tax credit for that amount. If you are a foreign national providing work within the U.S., you would need to review the tax treaty between America and your home country, as well as any visa requirements, to determine if you need to pay taxes to the U.S.
If you are a foreign national providing work to U.S. companies or clients, you would need to review the tax treaties between the U.S. and your home country to see if you need to pay U.S. taxes. The types of companies you work with and services you provide will also determine if you are considered to be doing business in the United States. Some things to consider while reviewing the foreign countries U.S. tax treaty include:
Each country's tax treaty is different. We recommend consulting with an international tax expert before engaging in business across borders.
Yes, you do! These platforms are not your employer, so they will not pay any taxes on your behalf. Whether you are connecting with clients through Fiverr or working as an UberEats driver, you are responsible for your own tax payments. That said, some of the companies may be able to provide reports to help you see how much you’ve made through their platforms and what expenses (such as fees) you can claim as deductions.
Yes, they do, just like any other business. During an audit, you will need to show the amount and type of any business expense you have previously claimed on your taxes. We recommend separating your business and personal accounts by getting a business checking account and credit card that are only used for business purposes to simplify your finances. You should also save all receipts and information related to your business and taxes for at least 7 years.
If you think you have filed your freelance taxes wrong, you should consult with a tax advisor. In general, you have three years to amend a return with the IRS to correct your mistake. Sometimes, the IRS may send a “tax notice” where they re-calculate your return if they believe you filed your taxes incorrectly, such as forgetting to file form SE. In this case, you won’t need to file an amended return if you agree with the IRS recalculation. You will likely just need to pay the outstanding balance listed on the tax notice.
Another mistake may include filing the wrong forms but still paying the right amount in overall taxes. In this case, no action may be needed. A tax advisor will help you determine the best next steps, no matter the issue.
If you have a full-time job, you will include the income from both your job (where you are getting a paycheck and a W-2) and your business on your personal tax return, Form 1040. Just make sure your business is registered in your home state before you start earning income through it. If you run a sole proprietorship or single member LLC, you will need to file a Schedule C with your personal tax return, as covered in Chapter 2. If you run a C or S corp, see Chapter 4 for more information about filing your business taxes.
It depends on your cash flow and what you think is best for your business. Though you will have to pay penalties for any late payments, the interest and penalty rates are currently low. This allows for a few options.
Some businesses may choose to overpay on their estimated taxes to avoid worrying about these fees altogether, no matter the current rates. Others may overpay so that they know they won’t need to make an additional cash payment when their tax return is filed.
Other businesses, however, may determine it is in their best interest to not pay estimated taxes at all and just pay the penalty with the tax return filing. For example, let’s say you think you will owe $50,000 with your estimated taxes this year. You can choose to keep the cash on-hand and re-invest this money into your business. The average penalty and interest payments would be around 5%, so you would pay a $2,500 penalty to the taxing authorities when you file your tax return and pay your outstanding balance. Since you re-invested your money into your business, however, you generated $10,000 of extra profit and made more than you would have if you had paid your estimated taxes, even after paying the penalties and interest.
You will have to make this risk/reward calculation for your business to determine the right decision.
If you can’t get all of your information and paperwork ready by April 15th (March 15th for partnership and S-Corp returns), the IRS has another option. You can file for an extension with Form 4868 (or Form 7004 for business returns) without paying any penalties, as long as you submit the form BEFORE April 15th and pay all taxes due. If you miss this deadline, you will just have to accept any fines or fees for filing late.
Every American is allowed to use this extension without providing a reason if they submit their request before the deadline. When you take advantage of this option, you will have until October 15th (September 15th for partnership and S corp returns) to file your taxes without late fees.
It is also important to note that this is an extension to file your paperwork but not to pay your taxes. If you file an extension, but fail to pay any taxes that are due by the deadlines given above, either by underpaying or not paying at all, you will pay 0.5% of any unpaid balance in late fees, plus interest. This “Failure to Pay” penalty will grow every month until you either pay the money you owe or it reaches 25% of your outstanding balance.
If you don’t file an extension, don’t file your paperwork by the deadline, and don’t pay any outstanding taxes, you will also pay a “Failure to File” penalty. With both this fee and the Failure to Pay fee, you will have to pay 5% of your outstanding balance in penalties, plus interest. It will grow until you either pay the balance or the fee reaches 25% of the amount you owed.
For state income tax payments, you may have to file another extension form with the state. Some states provide an automatic extension with no filing requirement as long as your taxes are paid in. Since each state is different, you will need to review the rules of your home state or consult with a tax advisor.