How do I pay taxes as a freelancer?
As a freelancer, it’s always recommended that you save between 25% and 30% of your income for your taxes. Here’s why!
“How much do I need to send to the IRS every quarter?” is a question that has given every freelancer a headache at one point or another. Lili doesn’t want you to be in pain! So here’s a quick guide that will hopefully help you save on aspirin.
If you used to work as a full-time employee, your taxes were automatically taken out of your paycheck and sent directly to the IRS (and your state treasury if you live in a state that has state taxes). So the only time you had to think about your taxes really was in April. As a freelancer, dealing with taxes is part of your job all year long, because calculating what you owe and physically mailing those checks falls on you.
To keep it simple, there are 2 buckets of taxes you pay as a freelancer:
The self-employment tax (Social Security & Medicare). This tax is 15.3% of everything you make and you have to pay it no matter what.
The income tax, which fluctuates depending on your income, your marital situation and gets adjusted when you file for the year.
As a full-time employee, you received one W2 form at the end of the year to file with the IRS (if you worked at the same company all year). That form tells the IRS how much you made and how much you contributed toward your income taxes and all the other taxes.
As a freelancer, no W2. Instead, you’ll receive a 1099 form from every single client you worked for that year. That 1099 form (which your client also sent the IRS) will show how much they paid you... and that’s it (remember, no taxes were collected from that payment!) So you’ll need to add up all the amounts from these 1099s to calculate your “gross annual income” (i.e. how much you made that year).
Keep in mind though, if you don’t receive a 1099 from a client that doesn’t mean that you don’t need to report that income to the government. Most clients will send you the form, but if they paid you less than $20,000 over the course of the year, they don’t HAVE to. It’s not a problem as long as you make sure to still include the amount you were paid in the total income you report when you file. This is why keeping your own records is so important when you’re a freelancer.
As a freelancer, you need to send some money to the IRS every quarter, just like a regular employee contributes to their taxes all throughout the year. It’s also usually better to spread it out rather than taking a big hit when you file in April. The first thing to know is that it’s an estimate, the exact amount will get adjusted at regular tax season. So if you’re off by a few hundred dollars, it is absolutely normal and you’re not in trouble! The IRS has a form, form 1040es, to help you calculate your quarterly payments.
But like many government forms, it can be a little intimidating. So here’s a simplified way to come up with your estimate
First, you need to estimate how much money you’re going to make over the course of the whole year: so how much money all those 1099s are going to add up to, aka your Gross Income. Let’s say $50,000 for 2019.
Then you need to subtract all Above-the-Line Deductions, also called “adjustment to income,” you think you’ll have for the year (contributions to retirement accounts, moving expenses, health insurance expenses…) Note that these are different from the day to day operation expenses you can deduct if you choose the itemized deduction instead of the standard deduction. So let’s say these above-the-line deductions add up here to $8,000.
This subtraction will give you your Adjusted Gross Income, in this case: $42,000.
Now, once you have your adjusted gross income, we need to determine how much of it actually is your Taxable Income. As a freelancer, you don’t pay taxes on the money you used to run your business. So you need to deduct these expenses from your income.
You can either itemize them (meaning you keep track of everything you spend for your business and report the total amount to the IRS) or take the standard deduction, which is the flat deduction the IRS offers to all the taxpayers. Since we’re making an estimate here and we’re trying to keep things simple, we’ll just take the Standard Deduction, which for a single taxpayer in 2019 is $12,000. So our Taxable Income lands at $30,000.
Then you need to check your tax bracket for the year (as a single taxpayer in 2019, with a taxable income of $30,000, you’d fall into the 12% bracket) so we estimate you would owe $3,600 of income tax for the year. Now, this is just the income tax portion. We still need to add the self-employment tax.
The self-employment tax is easier to calculate. First, you need to multiply your Gross Income by 92.35% (50% of your self-employment tax is deductible, so by doing this math, you’re making sure you’re not paying taxes you don’t owe). In this scenario, you’ll need to pay self-employment tax on an income of $46,175.
Self-employment tax is a flat 15.3% (12.4% for Social Security and 2.9% for Medicare), so for the whole year, you will owe $7,065 (15.3% of 46,175).
You can have an estimate of what you’ll owe for the whole year: $3,600 (income tax) + $7,065 (self employment tax) = $10,665.
But you pay quarterly, so you divide this number by 4! And we’re finally there: you now know you need to send the IRS a check for $2,666 every three months. Let’s just make it $2,667, to be safe! ;-)
The deadlines for your quarterly payments are as followed:
For the period Jan 1 to March 31: April 15
For the period April 1 to May 31: June 17
For the period June 1 to August 31: September 16
For the period September 1 to December 31: January 15 of the following year
Important Note: This covers only your federal taxes. If you live in a state that has a state income tax, you’ll need to calculate those as well and mail them to your state’s Treasury.