Freelancing certainly has its benefits, but it can result in a few complications come tax time. The Internal Revenue Service considers freelancers to be self-employed, so if you earn income as a freelancer you must file your taxes as a business owner. While you can take additional deductions if you are self-employed, you'll also face additional taxes in the form of the self-employment tax. Here are things to consider as a freelancer when filing your taxes.
Your first step as a freelancer is to gather and report all sources of your income. If you're like many freelancers, you have many sources of income.
Keeping track of all your income can be more difficult than if you were a traditional employee, in which case you'd get a single W-2 form for reporting purposes. As a freelancer, you're likely to get numerous 1099-NEC forms, (1099-MISC in prior years) one from each of your clients. If you receive payments through online payment services such as PayPal, you might receive a 1099-K. Payers will also send these forms to the IRS to report your income.
Under the American Rescue Plan, changes were made to Form 1099-K reporting requirements for third-party payment networks like Venmo and Cash App that process credit/debit card payments or electronic payment transfers. The change begins with transactions starting January 2022, so it doesn’t impact 2021 taxes. Beginning with tax year 2022 if someone receives payment for goods and services through a third- party payment network, their income will be reported on Form 1099-K if $600 or more was processed as opposed to the current Form 1099-K reporting requirement of 200 transactions and $20,000. This change could impact people working in the gig economy, online sellers, independent contractors, and other self-employed business owners.
When you're self-employed, you are your own boss—which is great news until tax time. In addition to regular income tax, freelancers are responsible for paying the self-employment tax of 15.3% in 2021.
- This tax represents the Social Security and Medicare taxes that ordinary employees have taken out of their paychecks automatically.
However, the amount also includes the employer portion of those taxes, since as a freelancer you are considered both an employee and an employer.
The ultimate goal when you file your taxes is to reduce your liability to the lowest allowable amount. As a freelancer, you'll likely have more business expenses than a typical employee, and you can take a number of tax deductions not commonly allowed as a regular employee. However, you're only allowed to take deductions ordinary and necessary for the operation of your business.
Typical deduction categories
As a general rule of thumb, freelancers can write off expenses for:
- business-related food
- office expenses
- required equipment or materials
The IRS guideline for freelancer tax deductions is that expenses must be ordinary and necessary.
- If you would have an item even if you weren't running your freelance business, it likely would not qualify for a deduction.
Since most freelancers work from home, the home office deduction can apply. The IRS allows you to write off everything from rent to utilities for portions of your home that you use as an office.
The catch is that your office space must be exclusively used for your self-employment work; you can't "borrow" your kid's room from 9 to 5 and consider that space your home office.
Travel and meals
Travel and meals are some of the trickier tax deductions as a freelancer.
- You're allowed to deduct the costs of traveling to a job—with the exception being commuting to an office—and business meals with clients are also deductible, at a 50% rate.
However, you'll have to provide concrete evidence that those expenses are necessary for the development of your business. You can't simply write off your vacation costs as "business expenses."
Education and certifications
If you're a learning buff and your interests overlap with your profession, your educational costs may be tax deductible.
- If you take classes to get certifications in your field or to enhance your business knowledge, you can typically write off those costs.
- The same is true for any licensing, registration or certification costs you bear.
As with all freelance expenses, these deductions must directly relate to your business.
- For example, you can't write off a class on gardening skills if you're a computer programmer nor can you write off education that trains you for a new career.
Equipment and supplies
One of the downsides of being a freelancer is that you don't have an employer to buy you equipment and supplies, like a computer or a printer. However, if you need those items to perform your job, they're usually allowed as a deductible expense. Similarly, any other items or materials you need for your business can qualify for a deduction.
To avoid problems with the IRS, keep your business and personal expenses separate. For example, you might run into a gray area if you deduct your cell phone or Internet service while using them only partly for work.
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