Income
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.
The IRS planned to implement changes to the 1099-K reporting requirement for the 2023 tax year. However, the IRS recently delayed the implementation of the new $600 reporting threshold for transactions from third party processors like Venmo and Paypal, reverting tax year 2023 back to the previously higher 1099-K reporting threshold (over $20,000 in payments and more than 200 transactions).However, some individual states have already begun to use the lower reporting threshold. Maryland, Massachusetts, Vermont, Virginia and the District of Columbia have a $600 threshold for requiring 1099-K in effect for 2023. North Carolina and Montana also have a $600 threshold, although state tax officials have said these states may offer relief. If you don’t receive a 1099-K, the IRS still expects you will report all your income, regardless of the amount.
Self-employment tax
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%. This tax represents the Social Security and Medicare taxes that businesses pay and that employees have taken out of their paychecks automatically. As a self-employed freelancer you are considered both the employee and the employer.
Tax liability
For most people, 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 that are ordinary and necessary for the operation of your business.
Typical deduction categories
As a general rule of thumb, freelancers can write off many expenses including:
- business-related food
- travel and lodging
- office expenses
- required equipment or materials
- phone and Internet service
The IRS requirement for business tax deductions is that expenses must be ordinary and necessary.
Home office
Since most freelancers work from home, the home office deduction can apply. The IRS allows you to take a deduction for many expenses ranging from rent to utilities for the 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 nor can you use the same space for a job that you work at as someone else’s employee.
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 your office—and business meals with clients are also deductible, but usually at a 50% rate.
However, your expenses have to be necessary for the development and operation 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 deduct those expenses.
- The same is true for business related licensing, registration or certification costs you have.
As with all freelance expenses, these deductions need to directly relate to your business. For example, a class on gardening skills would not typically be considered ordinary or necessary if you’re a computer programmer nor would 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 the entire amount of your cell phone or Internet service while using them only partly for work.
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