For many people, freelancing is considered a side hustle in conjunction with other jobs, side hustles, or salaried positions. While transitioning into the role of a full-time freelancer, it’s normal to want to hang onto your other income streams, so you have enough time to get your freelancing sea legs and prepare for the future.
It makes a lot of sense, which is why people will ponder what to do with their taxes regarding part-time freelancing work. The problem is that the lack of available information will scare too many people from learning more about the beauty and freedom of freelancing. We want to fix that.
Note: in the eyes of the IRS, freelancing, in general, is seen as an entrepreneurial endeavor that falls on you, the freelancer. Regardless of freelancing for 10-hours per week, or 60-hours per week, you are classified the same way for taxation purposes. As a result, we recommend glancing at our more comprehensive freelancer taxes guide, which can be accessed: here.
Overview: Freelancing Taxation Classification
The IRS regards freelancers as self-employed individuals, which means that you must file the income as a business owner. This income will be its own filing, separate from your salaried job. Although you can take additional deductions when self-employed that you could not take at a “regular” salaried position, you will also face other taxes in the form of self-employment tax.
Here is what else you need to know:
Step 1: Track Your Income
While working for yourself, you no longer have a boss monitoring your income. That’s on you. If you are a freelancer, you may have many different sources of revenue. You will receive numerous 1099s at tax time based on how many clients you had. Your tax forms can be easily managed in software, as we provide here at Continuum.
If you freelance on a site like Fiverr, you will fill out a W2 and claim the income as one singular client at the end of the year. You will not need to worry about the 1099s, but you will need to export the excel file that lists your total income from the site.
Step 2: Get to Know Self-Employment Tax
As a self-employed person, you are your own boss. Being self-employed is fantastic in so many ways but can make tax time a little more complicated. In addition to your regular taxes, you are responsible for a self-employment tax of 15.3%. The tax represents the Social Security and Medicare taxes taken out of a regularly employed person’s paycheck (you are paying this already at your salaried job).
This tax amount also includes the employer portion since you are considered both an employee and an employer.
Step 3: Manage Your Tax Liability
As a self-employed person, you can reduce your tax liability by using your expenses against what you earned. You will be able to take tax deductions for things like office expenses, office supplies, rent, utilities, lodging, business-related food and drinks, and so forth. You must be able to prove that the expenses were necessary for the management and growth of your freelancing business for them to be considered legitimate.
You can also pursue a home office deduction if you have a dedicated space in your home where you work. Using your room haphazardly does not count.
Lastly, you can deduct the costs of traveling for work, except commuting to your office. Business meals are also deductible at a 50% rate. Again, you will have to prove that the meal was necessary for the development of your freelancing business. In the middle of a pandemic, there are not a lot of client meals occurring.
Step 4: Advance Your Knowledge
If you take many online courses and complete certificates as a freelancer, you can write off these expenses for your business. But the classes need to be related to what you do for a living. If you are a graphic designer and take a gardening class, that does not count. The same holds for office supplies and certifications.
Is There a Minimum Amount I Have to Hit to Pay Taxes on Freelancing Income?
For those of you considering one or two clients every few months as freelancers, you may wonder if you have to report that income. This number continues to change at the federal level and varies depending on your location. We always recommend checking up on this number to see if laws have changed what you owe so that you can remain legal and compliant.
For right now, the minimum income classified by the IRS as owing freelancing tax is $400. You must pay self-employment taxes, in addition to regular income taxes, if you hit this number in a calendar year. Therefore, you must file a tax return if you gross more than $400 in 2021.
If you have business expenses that you want accounted for, along with this income, do not expect the IRS to figure that out on their own. You must file a Schedule C that indicates the expenses you consider to be deductions. At times, these expenses may outweigh the income and make it so that you do not owe any self-employment taxes. Do not skip over this part, and please seek out professional accounting support if you are confused with this process.
Why You Should Still Freelance, Even If It’s Part-Time
Don’t let taxes scare you: the deductions and flexibility of freelancing make it worth it. By simply tracking your income and expenses inside of our software, it is easy to compile a big picture view at the end of the year so you can report your information securely and accurately to the IRS.
As a part-time freelancer, we also recommend reading our guide to incorporating your business. No matter how many hours you put into the job, you are still claiming liability as to the self-employed person. Do your due diligence now, so you never have to worry down the line! We are here to help.