Freelance 101: Tax Considerations and Resources

By Amy Northard, The Accountants for Creatives

If you’re considering becoming a freelancer, either as a side gig or for your sole income, congratulations! From my own experience, I know that being your own boss is a rewarding and exhilarating endeavor. I would be lying, however, if I didn’t say there are some serious and sometimes confusing aspects to taxes for freelancers. With tax season upon us, I wanted to share some helpful advice and steps to take to make sure you’re ready and set for next year. If you’re a seasoned freelancer, there are also helpful links and resources in here to make your life easier!

Amy Northard, CPA
Amy Northard, CPA teaching freelancers about the accounting side of their creative businesses.  Image courtesy Relevant Conference.

Decide if you have a business or a hobby

When it comes to taxes, the first thing you’ll need to determine is whether you have a hobby or a business. If you’re freelancing just for fun without the intention of really making a profit, then you have a hobby. If you have a hobby, then you still need to report your income, but you won’t need to worry about other steps for setting up shop. 

If, however, your intent is to make a profit from freelancing, then you have a business. In this case, you should also be intentional about your recordkeeping because that recordkeeping will directly affect any tax deductions you might use to reduce your taxable income. Luckily, you can still file as a business and qualify for business-related tax deductions even if your business isn’t profitable in the first couple of years. However, after three years of not turning a profit, you’ll need to take steps to prove to the IRS that you’re a business and should be treated as such. 

Always report your income

It’s important to note that you must report your income to the IRS as soon as you make $400 gross income. That’s the amount you make from a client before any deductions for expenses. There are many misconceptions and falsehoods regarding this topic, but trust me, the IRS doesn’t care if you made a profit or if you’re just starting out; you have to report your income. 

Set aside self-employment taxes

Self-employment taxes are another consideration that you’ll have as a freelancer. This is not the same as income tax. These taxes are made up of two parts: Social Security tax (12.4%) and Medicare tax (2.9%). When you have an employer, the employer pays part of these taxes and withholds your part for you. However, as a freelancer, you’ll now be calculating and paying these taxes in full. 

Self-employment taxes are taken out for the first $137,000 of your earnings. To make sure you have enough to pay these taxes, I recommend that clients set aside 30% of their earnings that should not be touched until after taxes are paid. This is a general figure, so if you’d like a more exact estimate, you should speak to a CPA

Quarterly tax payments

If you know you’ll owe the IRS over $1,000 in taxes, you’ll need to make quarterly tax payments. These payments are estimates that are filed and submitted with Form 1040-ES. If in addition to your freelancing money, you also earn money from an employer, you can avoid making estimated tax payments by filing a new Form W-4 with your employer. On your new W-4, you should increase your withholdings from your paycheck. Also, if you live in a state with income taxes, you’ll need to pay quarterly taxes to the state as well. There is a penalty for not paying quarterly taxes. It depends on the amount you owe and how long it’s been overdue. 

Tax deductions

This part is important. You’ll want to save receipts and keep records for anything that could help you get a tax deduction. Common deductions that freelancers take include deductions for a home office, office expenses, rent or lease, legal and professional services, supplies, utilities, and travel expenses.  

Make it easy for yourself

The most important steps you can take to kickstart your business and set yourself down a path where your finances won’t be so hard to sort out are to:

Once you have a separate banking account, make sure you only use that account for your freelancing. As for the bookkeeping tool, there are many excellent software options available, or you can set up a spreadsheet yourself. Remember that the main goal is to have an easy way to track your transactions. If you need help or aren’t sure where to start, asking a CPA for advice or hiring one to help you get it done is always a good idea.  

Artist specific tax considerations

In some states, sales tax is now required for select services in addition to tangible products. Before you send out invoices, make sure you investigate whether your state requires you to collect sales tax on your products and services. These taxes will be due to the state either monthly, quarterly, or annually, so that’s something to find out as well.  

When it comes to collecting sales tax on digital products, shipped products, or products sold in online marketplaces, the sales tax laws also vary by state. Be sure to investigate these areas before setting your prices and business plan.  

Where to go for help

As you really get going, there are other items to consider as a freelancer and business owner. Common decisions and next steps include using cash or accrual accounting, setting up an Employer Identification Number, and finetuning your business plan. When you need help, don’t be afraid to reach out to a CPA you can trust.

AIGA Resources for freelancers

Many designers work as independent contractors. From new legislation to contracts and getting paid, resources for active freelancers and those transitioning to a freelance role, this guide provides an overview of the legal and tax basics that independent contractor designers need to know. In 2019, AIGA added and updated chapters previously found in the Design Business and Ethics publication. This web page represents a collection of legal guides written by lawyers and practice management experts. We encourage you to download and refer to these resources if you have questions about intellectual property—including copyright, trademark, or patents—employment law or freelancing. The accompanying collection of articles explain related legal issues, including how to advocate for your creative rights.

Article Illustration by Kimberly Cerna

By Amy Northard, The Accountants for Creatives
Published February 17, 2021