Freelancer tax guide: How to file and the forms needed

If you make a substantial amount of income as a contractor or freelancer, or if you freelance full time, you are required to declare that income on your 2021 tax return and make quarterly tax payments to the IRS.

“Freelance,” “self-employed”, or “contractor” income is money made without being a full or part-time employee. In other words, it’s income you receive without the standard W-2 tax form associated with traditional employment; you’ll receive a 1099 form instead. Most importantly, the tax burden is all on you. Funds aren’t automatically withheld throughout the year by an employer to cover your tax burden. When you work for yourself, you’ll have to pay the employer’s — and personal side — of taxes yourself.

Many sources claim you don’t need to file freelance taxes if your tax burden would be less than $1,000. According to the IRS, contractors and freelancers are required to file an income tax return if net earnings from self-employment are $400 or more.

Using a freelance tax guide can help you file your 2021 taxes and better understand your tax burden as a contractor.

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See also: Income tax guide 2002.

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Independent contractor vs. employee

If you’re not sure of what form you should receive or the level of tax liability you’ll be responsible for; the IRS classifies freelancers or contractors as anyone who is self-employed or works for themselves providing services to other businesses or the general public. 

There are further specific requirements that classify you as a contractor:

• You’re in control of the result without being directed on how to do it
• You aren’t trained to do the job by the company or individual contracting you
• You’re paid a fee or by the job
• You don’t receive benefits such as insurance or paid time off

The forms you need for freelance taxes

The two tax forms you may already be aware of are the W-2 tax form, which is received through traditional employment, and the 1040 form, which is the standard U.S. Individual Income Tax Return.

The forms freelancers need to file taxes properly are different.

Form 1099-MISC

Also referred to as the Miscellaneous Income tax form, this is the tax form used to calculate tax liability as a freelancer. If you made all of your income through freelancing, it would all appear on this form. Otherwise, your income might be split between a 1099-MISC form and a W-2 form.

Businesses you did contract work for may also send you a 1099-MISC form. If you did contract work for multiple businesses, you’ll need to collect this form from each company.

Form 1099-K

If you received any payments through what’s known as a “payment settlement entity” or “PSE,” they should send you a 1099-K form for payments over $600. PSEs include third-party settlement organizations like Zelle, Cash App, Venmo, PayPal and Stripe.

The 1099-K form is a statement of a reportable payment transaction. In some cases, a company or individual you did contract work for may not send you a 1099-MISC form and instead pay you via a PSE. If this is the case, you’ll need this document to report that income.

Form 1040-ES

This is the form you use to pay quarterly estimated taxes, which is an option some freelancers take to split up their taxes over four separate payments throughout the year. If you don’t want to fill out the form, you can also pay quarterly estimated taxes easily online through the IRS website.

Form W-9

If you did any freelance work for a business, you should have received a W-9 to fill out. This is the official form used by third parties to obtain your name, address and taxpayer information. If a company asks you to fill out a W-9 form, it means they will report to the IRS that they paid you money for contract work.

What you can deduct in freelance taxes

As a freelancer and a self-employed person, the government recognizes you as a business entity whether you’ve incorporated yourself as a business or not. This means you can take certain business tax deductions that W-2 employees generally can’t.

Some of the most common tax deductions taken by freelancers include the following:

Home office costs

If you maintain an office at home, you can write off the cost of that office on your taxes. You’ll need to calculate the overall size of your home or apartment in relation to your home office, then calculate how much rent you pay specifically for the square footage of that office space. Using the Simplified Option, you’d deduct $5 per square foot of office space.

In order to take this deduction, your home office must only be used for business purposes. For example, if you typically work out of your living room, you can’t claim it as your home office because it’s used for other purposes.

Utilities

If you maintain a home office, you can calculate the utility costs for maintaining that office as well — but only that office space, not the rest of your home. Typical utility costs include gas, electricity, heating, air conditioning and phone service.

Professional development costs

If you took any classes or courses relevant to your freelance profession, you can deduct these expenses on your taxes.

Professional website costs

Costs related to your freelancing website are considered a business expense and can be deducted from your taxes.

Software costs

Any expenses associated with the software you use exclusively for your business can be deducted from your taxes.

Mileage and travel expenses

If you travel or drive to conduct business as a freelancer, you can write off the mileage on your taxes. The IRS issues standard mileage rates every year for this purpose. 

The current rates are:

Costs of forming a business

If you’ve incorporated your freelance business, you can write off the expenses of doing so on your taxes, as these are legitimate business expenses.

Naturally, you’ll want to write off as many expenses as you can. But it’s important to be truthful and accurate when making deductions. According to Suzanne Vanzant, Owner of Professional Public Accountants in Miami, Florida, freelancers have a tendency to inflate their deductions to avoid paying more taxes.

“There are markers and red flags the IRS looks for when evaluating the information presented to them on your tax return, and they will take notice if the expenses are too high against the income,” Vanzant explains.

Self-employed people tend to be more vulnerable to audit than W-2 employees for this very reason.

How to file 2021 freelance taxes

If you’re a freelancer, you’ll need to file what most would consider a “complex” tax return. This means you likely won’t be able to use any free tax software if you want to declare your freelance income or take deductions.

It’s important to treat your freelance career as a business. For this reason, it may be a good idea to work with a tax professional so you can claim all relevant deductions and gain some protection against mistakes or an audit.

If you prefer to file taxes on your own, you can do so for free through the IRS website. Free tax filing software may be available to you if you made $72,000 or less over the course of the year. If you made more than this, you’ll need to file taxes by manually filling out forms, which means you’ll need to know how to fill out each form accurately. This can be risky for anyone who isn’t a tax preparer, as there are a lot of possibilities to make mistakes. You can also print out your relevant tax forms and mail them to the IRS.

In most cases, it’s safer — albeit more expensive — to use paid software or rely on a professional tax preparer if you received most or all of your income through freelancing.

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See also: Your guide to filing taxes in 2022.

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Quarterly filing for freelance taxes

You’re not alone if you didn’t know about filing quarterly estimated taxes.

“One of the most common mistakes I see independent contractors make is the failure to make estimated quarterly tax payments,” Vanzant says. “Failure to make estimated tax payments can ultimately end in an underpayment penalty on their taxes. We have a pay-as-you-go system, and the IRS wants its money as you make your money.”

Generally, federal quarterly estimated taxes must be paid on the following dates:

• April 15th

• June 15th

• September 15th

• January 15th

However, you should check with the IRS each year and save the dates they post into your calendar.

If you only made under $400 freelancing throughout the entire year, you likely don’t need to report it. But any substantial sum you made over the course of the year must be reported to the IRS and requires you to pay accurate quarterly estimated taxes on it. Failure to pay quarterly taxes isn’t the only way you can earn a penalty. Vanzant reminds freelancers and contractors that if you underestimate the amount owed or simply don’t make the payments at all, there will be a charged penalty.

Nonetheless, estimating quarterly taxes can be challenging. The best way to do it is to look at your previous years’ freelance tax liability and divide it by four. The IRS also provides a tax worksheet to help you do the calculations.

Unfortunately, there is no simple equation for calculating estimated taxes, as they depend on your deductions and the income you make. Many financial experts recommend you set aside between 25 and 30% of your income for taxes in a separate account throughout the year.

Freelancer tax FAQ