Inside: Paying freelance income taxes doesn’t have to be as scary as it sounds. Here’s how to prepare for and estimate your tax liability, including whether you’ll owe quarterly taxes or not.
I’m a firm believer that earning extra cash can change your life like a gold-toothed fairy godmother. Or Oprah. That works too.
Earning extra money can be especially life-changing for low-income folks tied to tenuous jobs. As in, any fish or wildlife technician ever.
But, a couple weeks ago, a reader brought up a good point.
Earning money through freelancing does cost money and is taxed differently. You don’t have an employer to take out your taxes and give you one straight-shot paycheck, after all. And, then there’s the higher self-employment taxes, and possibly even quarterly tax payments.
It’s enough to drive a new freelancer crazier than a hopped-up Spring Breaker on a bad ayahuasca trip. But does that mean you shouldn’t freelance?
Taxes don’t have to be super complicated. Yes, it will be different, but it is something you can learn.
In fact, in this blog post, I’ll show you exactly how you can come up with a rough estimate of how much taxes you’ll owe as a result of your freelancing. I’ll also tell you how to find out whether you’ll need to make quarterly payments, and how to keep track of everything so you can pay your taxes on time.
- 1 How is freelance income taxed differently?
- 2 How can I figure out how much I would owe in taxes?
- 3 How do I know if I need to pay quarterly taxes?
- 4 Example 1: Someone Earning $30,000 Per Year With $5,000 Of Freelance Income
- 5 Example 2: Someone Earning $40,000 Per Year With $5,000 Of Freelance Income
- 6 How do I pay my freelance income taxes?
- 7 How do I keep track of my freelance income to pay taxes?
- 8 Conclusion
How is freelance income taxed differently?
If you work for an employer, they will take out your income taxes for you. Here’s what taxes are taken out:
- Federal income tax — you pay this
- FICA tax — split between you and your employer
- State income tax — you pay this if your state does charge an income tax
Did you see what they did there with the FICA taxes? If you work for an employer, your income is taxed at 15.3%. Your employer pays half of the tax owed—7.65% of your income—and you pay the other 7.65% of your income.
But when you work for yourself, you pay the full amount on whatever money you make on your own, since in this case, you are your own employer. So, your taxes are 7.65% higher than they would be if you earned the same amount from a job. That’s where the term “self-employment taxes” comes from. And, according to the IRS, if you make more than $400 from self-employment or side-hustle income, you owe these income taxes.
How can I figure out how much I would owe in taxes?
Luckily, with the power of the Internet, there is a way!
I’d like to give a shout-out here to my friend Carrie Nicholson from Careful Cents who helped me vet these methods. Carrie is a former small business accountant who worked for places like H&R Block and Capital One. Now, she rocks an online website helping out other online entrepreneurs, and you should totally check her out.
Here’s what we’re going to do. We’re going to calculate your taxes using two scenarios:
- Without freelance income
- With freelance income
That way, you can see exactly what the difference is. That difference is what you’ll owe in taxes at the end of the year, or possibly quarterly.
Easier, More Accurate Route to Calculate Freelance Income Taxes
If you have last year’s tax return, the best way to do this is to use this tax calculator from H&R Block. Run through the calculator twice: once without freelance income, and once with freelance income.
When you’ve got those two numbers estimating your tax liability, subtract the larger one from the smaller one. That’s how much you’d owe in freelance income taxes.
Harder, Less Accurate Route to Calculate Freelance Income Taxes
If you don’t have last year’s tax returns, no sweat. There’s another back-of-the-envelope calculation that you can do instead.
- Use this calculator to estimate your Federal income and FICA taxes.
- Find your state’s income tax calculator on this page (scroll nearly to the bottom to find your state) and use it to estimate your State income taxes.
- Add these two numbers up to get your total tax liability.
Then, run through the process again, but this time add in your freelance income on the “Business/Self-Employed Income” on the first calculator’s tab. For state taxes, just add in the total amount (it’s not divvied up between your day job and freelance income).
Note that this method is less accurate because the tax gremlins like to come in and mess up your numbers (not really). This method (and to an extent the one above) don’t take into account the myriad of deductions and other things that could change your tax liability. It’s just for funsies, quick, back-of-the-envelope information only.
How do I know if I need to pay quarterly taxes?
Ah, quarterly taxes.
Good news: you don’t even need to bother with this hassle unless you expect to owe the Federal government $1,000 or more in taxes from your freelance income at the end of the year. Unless you expect to owe more than $1,000 in Federal taxes, you can just pay your taxes at the end of the year when you file your tax return.
And, if you do owe quarterly tax payments, honestly, they’re not that bad. My accountant sends me a notice once per quarter to send my damn check in. I pop that sucker in an envelope, smack it on the bum for good luck, and send it in. That’s it.
Example 1: Someone Earning $30,000 Per Year With $5,000 Of Freelance Income
Who’s ready for some actual numbers?
I used the second, less accurate method above since this hypothetical case is of my imaginary friend Esmerelda. She does not have a tax return because she did not file taxes last year. What an asshat. Don’t be like Esmerelda.
Here’s what my imaginary single friend Esmerelda would owe if she just earned $30,000 from her day job in Colorado:
- Federal taxes: $1,970
- State taxes: $1,389
- Total tax liability: $3,359 ($1,970 + $1,389)
Now, here’s what imaginary Asshat Esmerelda would owe if she earned $30,000 from her day job, plus an extra $5,000 from freelancing:
- Federal taxes: $2,450
- State taxes: $1,621
- Total tax liability: $4,071 ($2,450 + $1,621)
So, if Esmerelda keeps working just at her day job, her employer will take out roughly $3,359 from her paycheck over the course of a year.
But if she earns $5,000 in freelance income, she’ll be responsible for paying $712 in taxes at the end of the year.
I’d also like to point out how much extra Esmerelda would owe in Federal taxes specifically: $480 ($2,450 – $1,970). Since this doesn’t pass the $1,000 threshold, she doesn’t need to worry about quarterly tax payments. She can just pay the bill at the end of the year. No paper-check-bum-smacking needed.
Example 2: Someone Earning $40,000 Per Year With $5,000 Of Freelance Income
Let’s look at another example. People just starting out in the wildlife profession generally earn between $30,000-$40,000 per year, so let’s look at the other end of the spectrum.
Here’s what my imaginary friend Bob Loblaw would owe in taxes if he just kept working at his regular day job (I have a lot of weird imaginary friends. Don’t judge.):
- Federal taxes: $3,170
- State taxes: $1,852
- Total tax liability: $5,022 ($3,170 + $1,852)
And, again, here’s what Bob Loblaw would owe if he made an extra $5,000 this year on top of the $40,000 from his day job:
- Federal taxes: $3,650
- State taxes: $2,084
- Total tax liability: $5,734 ($3,650 + $2,084)
Bob Loblaw will owe an extra $712 per year also as a result of his freelance activities. He too would owe $480 in extra Federal taxes, and so Bobby is also scot-free for having to worry about quarterly tax payments.
How do I pay my freelance income taxes?
Here’s where a lot of people get tripped up—and where you can step ahead.
At the end of the year, you’ll report your freelance income on a Schedule C form unless you have a fancy-schmancy business structure like an S-Corp. If you use a tax preparation software, it’ll do it for you, otherwise you can do it yourself or have an accountant do it for you.
This is where a lot of people are unprepared. They’ve just been keeping all of their income and making it rain like Friday night at the disco each time they get paid from their side hustle. Then, at the end of the year, they’re faced with a big surprise tax bill. In the case of Asshat Esmerelda and Bob Loblaw above, they’d each owe $712 to State and Federal coffers.
Stop. There’s a better way than that.
If you set aside a certain percent of your income, you don’t even have to worry about the big tax bill at the end of the year.
“Generally speaking, I always tell freelancers to take 20-25% off the top of their side hustle earnings. This usually covers self-employment tax and state taxes,” says Carrie.
I’m a bit more on the conservative side (that’s the first time I’ve ever said that). I set aside 30% of each paycheck I get just to make damn sure I don’t have to pay any taxes at the end of the year.
I plunk each 30% chunk from every paycheck I get into a separate high-interest savings account just for taxes. Because it’s in a high-interest savings account, I get bonus money since it earns interest.
Each quarter, I pull out the required amount that my accountant tells me and send it into the IRS and the State of Colorado. If there’s anything left at the end of the year after I settle my taxes, it’s like a year-end bonus. That’s something I damn sure never had working in the wildlife field.
How do I keep track of my freelance income to pay taxes?
It’s a good idea to get some sort of accounting system to help you track your freelance business finances. I use Freshbooks, and I love it like my best friend’s little puppy dog. I enter in any income I receive in my bank account along with any expenses for my freelancing.
This makes taxes super easy at the end of the year. All I have to do is print off a Profit & Loss Statement for my accountant along with a few other rando docs, and Bob’s your uncle. It literally took me like 15 minutes to get all the tax information rounded up for my accountant, thanks to Freshbooks. I’ve had way bigger headaches from ex-boyfriends.
Freelance income taxes sound super-scary, but once you get the hang of what the hell’s happening, they’re not that bad.
Your first tax return will be the most nerve-wracking, but rest assured, no IRS agents are going to bust through your wall like the Kool-Aid man and hold you and your bank account up at gunpoint. Besides, each tax return after that will be a breeze once you get the hang of it.
Not knowing how to deal with freelance income taxes should not hold you back from earning more money. In our example above, Asshat Esmerelda and Bob Loblaw both owed $712 in taxes, but they kept $4,288. Over the course of 12 months, that means their freelancing moved them ahead financially by $357 each month.
That’s an extra student loan payment, or a retirement plan contribution! What would you do with extra income like that?
Is fear of paying freelance income taxes holding you back from earning more? Or, if you are freelancing, how do you manage your taxes? Was it as scary as you thought it would be? Leave a comment below!