Freelancing is a popular choice for many workers in the USA, but for tax purposes, there is no specific category for “freelancer.” Instead, freelancers typically file taxes as “self-employed” individuals or “independent contractors.” Depending on how you file, you may be subject to different taxes. However, all self-employed individuals and independent contractors are required to pay state and/or federal income tax and self-employment tax. Additional taxes may apply depending on the nature of your business, which will be discussed later.

Which taxes apply to freelancers?

Understanding the nuances of each tax type is crucial for maintaining compliance and avoiding penalties. Freelancers should keep detailed records of their income and expenses, and consult with a tax professional if they are unsure about their obligations.

Income Tax

Freelancers must pay federal income tax on their net earnings (total income minus allowable deductions). The rate varies based on income levels and filing status. The IRS uses a progressive tax system, meaning the more you earn, the higher the rate you’ll pay on the income within each tax bracket.

In addition to federal income tax, freelancers may also be subject to state income tax (depending on the state they live and work in). Some states, like Texas and Florida, do not impose a state income tax, while others, like California and New York, have relatively high state income taxes. Additionally, some local jurisdictions impose their own income taxes.

What to bear in mind:

  • Freelancers are responsible for calculating and paying their own income tax.
  • Income tax is typically due on April 15th each year unless extensions are filed.
  • Quarterly estimated tax payments are required for those who expect to owe $1,000 or more in taxes for the year.

Self-Employment Tax

The self-employment tax covers the Social Security and Medicare contributions that would typically be paid by an employer if the freelancer were an employee. As a freelancer, you’re considered both the employer and the employee, so you pay the full amount (15.3%) on your net earnings.

This tax is divided into:

  • 12.4% for Social Security (up to a certain income limit, which changes annually — for 2025, it’s $160,200).
  • 2.9% for Medicare (with no income cap).
  • An additional 0.9% Medicare tax applies to income over $200,000 ($250,000 for married couples filing jointly).

Freelancers must calculate their self-employment tax using Schedule SE when filing their income tax return. The self-employment tax is usually paid in addition to regular income tax.

What to bear in mind:

  • This tax is calculated on net earnings (income after expenses).
  • Freelancers can deduct half of the self-employment tax when calculating their adjusted gross income, though they still pay the full amount.
  • Self-employment tax applies to freelancers who earn over $400 annually in net earnings from self-employment.

Sales Tax

Sales tax applies to certain goods and services. If you’re selling tangible products or providing taxable services, you may need to collect and remit sales tax to your state or local tax authorities. However, the application of sales tax to services varies widely by state, and not all freelance services are taxable.

For example:

  • In California, some professional services, like legal or accounting services, are exempt from sales tax, but tangible goods sold (e.g., product sales) are taxable.
  • In New York, many types of services are also exempt, but things like software sales or digital products may be taxable.

Sales tax is generally charged as a percentage of the sale price of goods or taxable services. Freelancers must register with their state’s tax authority to collect sales tax, then remit the tax collected to the appropriate state or local agency.

What to bear in mind:

  • Sales tax applies differently depending on the state, so it’s important to understand your state’s specific rules.
  • If you sell goods or services to clients in multiple states, you may need to collect sales tax in each state where you have a “nexus” (a significant connection, such as physical presence or sales thresholds).

Estimated Taxes

Freelancers don’t have taxes automatically withheld from their paychecks, so they must make estimated tax payments to cover their federal income tax and self-employment tax obligations. The IRS expects freelancers to make these payments quarterly, and they’re due on the 15th of April, June, September, and January of the following year.

Estimated taxes are based on your expected income for the year. To calculate your estimated tax payments, you can use IRS Form 1040-ES. If you don’t pay enough through estimated taxes, you could face penalties.

What to bear in mind:

  • If you expect to owe $1,000 or more in taxes, you are generally required to make estimated payments.
  • You can adjust your quarterly payments throughout the year if your income fluctuates.
  • Failure to pay estimated taxes may result in penalties, so freelancers must stay on top of their payments.

Other Taxes

Freelancers may encounter additional taxes depending on their type of work, their business structure, or the location of their business. Some of the common additional taxes include:

  • State and Local Business Taxes: Some states and cities impose business taxes in addition to income tax. For example, a state may have a flat business tax or a tax based on revenue or the number of employees.

  • Unemployment Taxes: While freelancers generally don’t pay into the unemployment system, certain freelancers in specific industries may be subject to unemployment taxes or may choose to pay into an unemployment insurance program voluntarily.

  • Excise Taxes: If a freelancer works in a specialized industry, like the sale of alcohol, tobacco, or gasoline, they may be subject to excise taxes, which are taxes on specific types of goods or services.

  • Property Taxes: If a freelancer owns property or equipment related to their business, they may need to pay property taxes based on the value of that property.

What to bear in mind:

  • It’s important to check your state’s specific requirements for business taxes, as they can vary widely.
  • If you have a business structure like an LLC or corporation, there may be additional tax responsibilities.

How to file self-employment taxes step by step

If you are self-employed and want to file your own tax returns without the help of a tax professional, there are a few things to keep in mind. Simple tricks and tips can save a lot of work and stress at the end of the year. In the following step-by-step instructions, we explain how to calculate self-employment taxes correctly without too much effort.

Document revenues and expenditure

The most important thing when filing a self-employment tax return is to have a clear, comprehensive overview of your financial year. While there is no law requiring business owners to keep bookkeeping records, it is in their interest to adhere to Generally Accepted Accounting Principles (GAAP). This helps run the business smoothly, file taxes effectively, and explain themselves in case of an IRS audit. The same applies to the self-employed. The clearer your records are throughout the year, the easier it will be to file your tax return at the end of the tax period.

As a rule, two simple Excel sheets are sufficient to document income and expenses: one for revenue and one for expenditure. These tables should include the date, service provider/salesperson, service or product description, gross amount, and document reference number (for receipts or invoices kept as proof of purchase/sale) in separate columns. If you are also liable for sales tax, you can create columns for net amounts, sales tax, and calculated sales tax. This helps you keep track and saves work in the long run.

Collect and sort documents

Having revenue and expenses is one thing, but being able to keep track of them is another. Business activities need to be documented, and it’s better to have too many records than too few. Supporting documents should include receipts for cash payments, transfer receipts, delivery notes, pay slips, fuel, and entertainment receipts.

Tip

Another key benefit of document organization is the legal obligation to keep receipts. The IRS requires all freelancers to retain business records for four years in case of discrepancies that might warrant investigation. You are also required to keep your past tax returns for at least 3 years from the filing deadline or date of submission. Some states impose their own time limits for audits, but most follow the federal recommendation.

While no specific law mandates the bookkeeping system you use, it’s often easier and more accurate to use a digital filing system along with retaining paper receipts. A well-organized record-keeping system should allow you to add new documents to your database as you get them. Programs often create folders where documents are systematically filed.

If your business operates under the cash accounting method, then two core folders should usually suffice:

  • Account statement folder, filed chronologically; documents are filed behind each account statement.
  • Folder for cash documents, sequentially organized by document number.

For businesses that determine profits via the accrual accounting method (using a profit and loss statement and balance sheet), the IRS recommends a different organization:

  • A/R invoice folder, sequentially organized by document number
  • Incoming invoice folder, sequentially organized by document number
  • Account statement folder, sorted chronologically
  • Cash book folder, with supporting cash documents sorted chronologically
Tip

Since receipts can fade over time, they should be stored with backup copies if possible.

Calculate profit: Cash method or accrual method?

How you calculate your profit determines the amount of income tax you’ll pay. There are two options for calculating profit:

  • Accrual Accounting Method: Uses a profit and loss statement and a balance sheet.
  • Cash Accounting Method: Expenses are only recognized when the money is actually paid out.

Self-employed individuals can usually use the cash method, which is simpler, while larger businesses may be required to use the accrual method.

A simple profit margin report is sufficient for self-employed individuals. This simply refers to the amount of revenue from sales minus the costs of running your business. This can be calculated by subtracting your business outgoings from your business earnings.

Tip

There are various accounting software options available that can help with creating a balance sheet and calculating net profit.

What Can I Deduct?

Self-employed individuals can deduct a variety of business expenses from their taxable income, thus lowering the overall amount of income tax they need to pay. Some common deductible expenses include:

  • Office supplies
  • Rent for business premises
  • Training and educational costs (if relevant)
  • Wages paid to employees
  • Car expenses and other fixed assets subject to depreciation
  • Retirement plan contributions (e.g., IRA)
  • Entertainment costs (subject to limits)
  • Travel expenses
Note

While some items can be directly deducted, others, such as depreciable assets (e.g., machinery, office furniture, company cars), must be written off over several years.

File your self-employment tax return

Self-employed individuals can file their taxes electronically (through the IRS e-filing system), via mail, or with a registered tax professional.

For quarterly estimated tax payments, you must submit Form 1040-ES to pay your self-employment tax, Social Security, and Medicare taxes.

When filing your annual tax return, you will likely need to fill out the following forms:

  • Schedule C (Profit or Loss from Business) or Schedule C-EZ (Net Profit from Business) to report profits and losses as a sole proprietor.
  • Schedule SE (Form 1040) to file self-employment tax.

File deadlines and extensions

The IRS recommends filing your tax return by April 15 each year. However, if you are short on time, you can file for a 6-month extension using Form 4868. This extension only applies to the filing deadline, not to payments due.

Lodge an appeal, if required

Once you submit your tax return, the IRS usually processes electronically filed forms within 21 days, while paper returns can take 6-8 weeks. After receiving your tax bill or refund, it’s good practice to have a tax professional review the assessment for errors. You have 30 days from the determination date to file an appeal in writing. The appeal should be sent to the IRS address on the letter, not directly to the Office of Appeals.

Please refer to the legal disclaimer for this article.

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