- All freelancers must pay federal income tax and FICA tax. Some freelancers must pay additional state and local taxes. Freelancers must pay taxes quarterly to avoid penalties.
- Freelancers can claim deductions, including for office rent and utilities, travel and transportation, insurance premiums and office supplies.
- An invoicing system, finance spreadsheets, and accounting and tax software can help you track earnings and deductions, and thus lower your tax burden.
- This article is for freelancers who want to lower their tax burden.
Most freelancers overpay their taxes, which can severely disrupt cash flow. Are you? According to the freelance tax platform FlyFin AI, freelancers overpay their annual taxes by an average of $3,000. This overpayment often stems from not properly tracking one’s freelance business expenses and not knowing which expenses to deduct. To help you avoid overpaying taxes and other common tax mistakes, we spoke with freelancers and accountants about how to track expenses, maximize deductions and avoid tax surprises.
What taxes must all freelancers pay?
Freelancers must pay the following taxes no matter their location:
1. Federal income tax
All freelancers must pay federal income taxes. Your tax rate will vary based on your income bracket. These brackets differ for single filers, joint filers and heads of household. Below are the 2022 federal income tax rates for single filers based on income.
- $0 to $10,275: 10%
- $10,275 to $41,775: 12%
- $41,775 to $89,075: 22%
- $89,075 to $170,050: 24%
- $170,050 to $215,950: 32%
- $215,950 to $539,900: 35%
- $539,900 or more: 37%
Notably, each portion of your income is taxed at the above rates. For example, if you earn $75,000 in 2022 as a freelancer, you’ll pay 10% on the first $10,275 of your income. You’ll then pay 12% on the next $41,775 minus that first $10,275, which would be $31,500 of your income. After that, you’ll pay 22% on the remaining $75,000 minus the $41,775, which equals $33,225 of your income. That means your federal tax liability would equal $12,117.
Here’s a look at how it breaks down in a mathematical equation:
(0.1 * $10,275) + (0.12 * $31,500) + (0.22 * $33,225) = $12,117
2. FICA taxes
FICA taxes are contributions to the federal Medicare and Social Security programs. Employers pay a Social Security tax rate of 6.2% and a Medicare tax rate of 1.45%, as do employees. However, as a freelancer, you are both the employer and the employee. That effectively doubles your FICA tax rate to 2 * (6.2% + 1.45%) = 15.3%. This is a major reason freelancers typically pay higher taxes than employees.
The need to pay FICA taxes on top of federal income taxes “surprises, I would say, the majority of new freelancers,” said Logan Allec, a CPA and owner of tax relief company Choice Tax Relief. “If you make at least $400 in self-employment income, you’ve got to file a tax return and pay the self-employment tax.”
As a single-filer freelancer, you must pay 12.4% in Social Security taxes on the first $147,000 of your self-employment earnings and 2.9% in Medicare taxes on the first $200,000 of your self-employment earnings. This rate increases to 3.8% for any earnings above this amount.
What taxes must only some freelancers pay?
You might pay the following additional taxes based on where you live:
1. State income tax
Forty-one states charge their own income taxes. The nine states that don’t charge income tax are Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming. If you file your taxes in these states and live in a region without local income taxes, you’ll only pay federal income taxes.
As an example of state income taxes, let’s say you live in Philadelphia. There, you’ll be subject to Pennsylvania’s state tax rate of 3.07% for 2022. That’s on top of your federal income and FICA taxes – and, in Philadelphia, local income taxes also apply.
2. Local income tax
In 17 states as well as Washington, D.C., you may be subject to local income taxes. To use Philadelphia as an example again, the city tax rate there is 3.79% for 2022.
Josh Svetz, a Washington, D.C.-based freelance journalist, noted that you may need to start paying a city’s taxes soon after you formally establish residence there.
“[If] your paperwork is transferring over, and you have residency and you’ve been here for a couple years, then you have to switch to D.C. tax,” Svetz said. “If you have some [income] from [another state], some from D.C., you really want to make sure that’s centralized, because otherwise” the IRS could take note. This advice applies to all cross-state moves.”
To sum up how much certain freelancers may pay in taxes after including local taxes, let’s say you’re a freelance single filer in Philadelphia. Let’s also say your 2022 freelance income is $75,000. On top of your $12,117 federal income tax, you’ll owe the following taxes:
- FICA: 15.3% * $75,000 = $11,475.00
- State: 3.07% * $75,000 = $2,302.50
- Local: 3.79% * $75,000 = $2,842.50
Combined with your $12,117 federal tax liability from the example above, that’s $28,737, or 38.3% of your income. That figure can be less if you pay your taxes frequently enough and take the right deductions.
How often do freelancers pay taxes?
Freelancers must pay federal and (if applicable) state taxes quarterly. You must mail your quarterly tax payments to the appropriate government tax entity by April 15, June 15, Sept. 15 and Jan. 15.
If you neglect to pay federal quarterly taxes, the IRS will charge you a penalty. State and local bodies that collect quarterly taxes may charge penalties as well. You’ll also face a penalty if you fail to pay your taxes on time.
“The estimated tax penalty isn’t a tidy little half a percent a month like the failure-to-pay penalty,” Allec said. “The IRS has this table called a 6621 table that gives, essentially, an interest rate on the underpay of estimated taxes. Right now, the rate is 5%. Last quarter, it was 4%. The quarter before, it was 3%.” Allec said the failure-to-pay penalty is “half a percent per month of the [annual] amount owed, up to 25% maximum.”
Key takeaway: Pay your estimated quarterly taxes on time to avoid fees.
What deductions can freelancers take?
Sarah York, an accountant with Keeper Tax and an enrolled agent with the IRS, said freelancers can take four main categories of deductions: freelance business deductions, the standard deduction, the qualified business income (QBI) deduction and a deduction for half of one’s self-employment tax.
“Those are all completely separate,” York said. “You take them all on top of each other. One doesn’t exclude the other. You can take the standard deduction and freelancer deductions, because the standard deduction is a personal deduction [and] the freelancer deductions are business deductions.”
For the 2022 tax year, the standard deduction is $12,950. The QBI is 20% of your total freelance income, though York noted that QBI doesn’t apply to incomes of $400,000 or more. Using the above Philadelphia freelancer example again, the QBI deduction would amount to 0.2 * $75,000 = $15,000. The self-employment tax deduction would be 0.5 * $11,475.00 = $5,737.50.
Freelancer business deductions vary, and they often bring you substantial tax savings. You subtract the sum of these deductions, your QBI deduction, your half of self-employed taxes deduction and your standard deduction from your total freelance income. Then, you calculate your taxes based on that final amount.
Tip: Work with a CPA to maximize your deductions. A good CPA will usually save you more than it costs to have them prepare your taxes.
10 common freelance business deductions
The freelancers and tax experts we spoke with identified the following common freelance business deductions.
1. Home office
If you pay rent for the space in which you do your freelance work, you may be able to claim your rent as a deduction. This deduction is commonly known as the home office deduction. You can take it if you meet the following requirements:
- The working area is used solely for your freelance business activities. That could mean a freelance-work-only desk in your bedroom or a whole room where you do your work. It doesn’t mean your living room table, where you both work and host friends after work.
- You use the working area regularly and predictably. How often per week you work isn’t a factor as long as you use the work area the same amount, in the same way, every week.
- You use the area as your primary working site for your most important work.
Additionally, if your home office is only part of your space, you can only deduct part of your rent. For example, let’s say your home office is just a desk that makes up 3% of your home’s square footage. Let’s also say your rent is $12,000 per year. In that case, your deduction is 0.03 * $12,000 = $360. Allec noted that there’s a simplified calculation of “$5 per square foot of your home or apartment [that] you use for square business, up to a maximum of 300 square feet.” This calculation caps this deduction at $1,500.
Colin S. Smith, a sole proprietor who owns the musician services company Fresh Paint, said the home office deduction is a major benefit for him. He uses the percentage-based calculation to determine how much he can deduct. “I work from home, so I have a home office and I’ve measured out the rough dimensions of it,” he said. “It’s basically 10% of my apartment space.”
2. Utilities, phone and internet
You can deduct your utilities, phone and internet expenses if your office space meets the above definitions of a home office. As with rent, you must take utility deductions based on the percentage of your home that your office space occupies.
For example, let’s say your annual utility bills come out to $2,500 and your office constitutes 3% of your square footage. In that case, your deduction is 0.03 * $2,500 = $75. You can also use the simplified calculation.
“I deduct rent, bills like electricity and Wi-Fi, and my cell phone bills,” Smith said. ‘I use that a lot for work calls and messages.”
3. Travel, transportation and mileage
If business travel is a major part of your freelance work, you can often score major deductions in this category. Any expenses you incur for or during travel expressly for business purposes can be deductible, including the following:
- Public transit fares
- Rideshare fares
- Airplane tickets
- Any meals outside entertainment
- Laundry and dry cleaning
- Business travel mileage
“By the nature of working in music,” Smith said, “my social and my work life can overlap pretty frequently. So, if I’m being guest-listed by an artist I work with, [I can] deduct the ride there if we chat about what they’re working on.”
York pointed to car mileage deductions as an oft-untapped source of deductions. “A lot of deductions get walked away from,” she said. “The ones that I see most often are home office deductions and mileage deductions, car-related deductions. … A lot of people think, ‘If I work from home, then I can’t qualify for a car deduction,’ or ‘If I drive for work, then I can’t qualify for the home office [deduction].’ That’s not true.”
To take this deduction, you’ll need to tally the number of miles you drive for freelance business purposes. You can deduct 58.5 cents per mile driven between Jan. 1, 2022, and June 30, 2022, and you can deduct 62.5 cents for every mile driven during the rest of the year. You can use an expense tracking app to determine your mileage and back it up with receipts.
If you pay your own monthly medical, dental and vision insurance premiums as a freelancer (i.e., you are not covered under a separate employer-sponsored plan from someone else, such as your spouse), you can deduct those premiums. So, for example, if your premiums total $400 per month, that’s a $4,800 deduction for the year. However, York noted that this is not directly a business deduction.
“You qualify for [the insurance deduction] because you’re self-employed, but it functions differently from other business write-offs because it doesn’t lower your business income directly,” York said. “It’s actually a general income adjustment on your 1040 return. So it lowers your overall income tax, but it doesn’t lower your self-employment taxes, which is what most business write-offs do. It’s a great deduction, but it only really helps your income taxes.”
If you’re taking home office deductions, you can deduct a different type of insurance as a business expense: renter’s insurance. You calculate your renter’s insurance deduction just as you would for rent itself: If your policy costs $200 per year and your office makes up 3% of your square footage, your deduction is 0.3 * $200 = $6.
The cost of a dinner in which you discuss business with a client is deductible. That said, the IRS’ business meal criteria are pretty strict. It’s wise to seek an accountant’s help to ensure you don’t raise any red flags.
That said, many freelancers claim this deduction without professional help. “It’s not like I deduct every single time I go to a restaurant,” Smith said, “but a lot of meals, a lot of [getting] coffee, a lot of bar hangs overlap my work life.” The expenses that come from those moments may be deductible if business is discussed.
Svetz offered another perspective on deducting meals, noting that he’s learned a lot from his mom, a CPA, and his dad, a self-employed entrepreneur. “Freelancers think that, if I [deduct] too much, [the IRS will] start looking at my [records]. … At the end of the day, there are no penalties for trying to get a deduction, unless you’re trying to get everything deducted or you’re lying about charity.”
The worst-case scenario is that the IRS rejects your deductions, Svetz said. A small amount isn’t going to sound alarm bells, but if “you want thousands of dollars off something,” you could raise red flags,” he said. “[Have a] paper trail and make sure you can back [it] up.”
Tip: Some accounting software platforms include access to professional accountants who can help you navigate tricky deductions. Visit our accounting software reviews page to find options on our top picks.
6. Office supplies and equipment
Basic office equipment (such as pens, pencils and notebooks) and larger office purchases (such as printers and laptops) are deductible. You can deduct the full costs of these purchases.
“I got a chair earlier in the pandemic [to] take care of my back and posture,” Smith said. “I have a nice lamp for good lighting.” Both items count as office equipment because they enable Smith to do his job the best he can.
7. Professional services and membership dues
You can deduct any costs you incur while outsourcing certain work tasks, as well as any professional membership dues. For example, if you hire an accountant to file your 2022 taxes, you can deduct their fee on your 2023 taxes. If you buy business cards, the cost is deductible. If you pay for access to any service or organization that helps you find business or develop your skills, that cost is deductible, too.
8. Other subscriptions
Both Svetz and Smith classify streaming services under their business expenses, but that’s because they use those services for work.
“[I] use YouTube to not only find interviews but also get certain music stuff” for my work, Svetz said. He named Spotify, Apple Music and SoundCloud as examples of other potentially deductible streaming subscriptions. “If you’re a video editor, you can write off paying out of pocket for your video editing software,” he added. Smith said he writes off his Tidal subscription because he uses it “to see how my artists are doing and see how other artists are doing it.”
9. SEP IRA retirement plans
Freelancers are eligible for a special type of retirement plan known as an SEP IRA. You can put up to 20% of the money you earn into this plan, with a contribution limit of $61,000 for 2022. All money you put into this plan is fully tax-deductible. Visit our retirement plan reviews page to learn why Fidelity is our top pick for self-employed retirement plans.
10. Transaction fees
Let’s say you get hit with a transaction fee whenever clients pay you. At the end of the tax year, add the fees and then deduct that sum.
Somewhat similarly, Smith recommended that freelancers fold their tax liabilities into the rates they charge. “I factor in the rough estimation of taxes into my fees and rates,” he said. “[Taxes are] the cost of you doing business over time.”
How to track freelance earnings and tax deductions
You can easily claim all of the above deductions and calculate your tax liability if you properly track your earnings and expenses. Here’s how:
1. Establish an invoicing system.
You should always invoice your clients for your work, even if they’re friends or longtime clients whom you know will pay. This generates a paper trail you can use to pursue payment and track your earnings. Smith recommends the invoicing app Wingspan, and you can visit our invoicing app reviews page to find more options.
2. Separate your personal and business finances.
Business finance experts consistently recommend that freelancers and small business owners open separate business and personal bank accounts. The same is true of business and personal credit cards.
“I have a separate bank account for my income, and then I have different credit cards too,” Smith said. “That helps me streamline a lot of my expenses so that I can be prepared by the time tax season comes up [and] I’m not scrambling as much. This year, I was completely on time, and that was really helpful to avoid any penalties or extra fees.”
3. Create an earnings spreadsheet.
Each time you send an invoice, mark it on a spreadsheet. Include columns for the client’s name, project title, rate, invoice number, date invoiced and date paid. Group all projects for a certain client together for easier organization. At the end of the year, add it all up to get your total freelance income. Any clients that pay you $600 or more during the year must send you a 1099 form.
“I use a Google spreadsheet,” Svetz said, “and I have a counter to put in how much money I made from each place.”
4. Create an expenses spreadsheet, and keep all your receipts.
Every time you incur a deductible expense, you should mark it on a separate spreadsheet. Include columns for the date, expense title, category, cost and a link to a receipt. Your expense tracking app can help you isolate your potentially deductible expenses from your other costs.
You can’t claim deductions without a paper trail. That expensive client dinner you were hoping to deduct has no value without receipts to prove that it happened. Plus, going through your receipts when it’s time to file taxes is a great way to be certain you didn’t accidentally overlook any deductible expenses.
When tracking expenses and deductibles, York suggests that freelancers “do it early, and do it often. Most people make the mistake of waiting until they have to file to do it, and that always leads to missing stuff. Trying to recreate a year’s worth of [earnings and expenses], you’re not gonna be as thorough as you would’ve if you just kept on top of it. … It can be on an Excel spreadsheet, or you can get software to do it.”
5. Automate the process with accounting and tax software.
If you truly want to cut no corners, couple your manual accounting with software. Implementing accounting software is a great way to automatically record and categorize all your freelance earning and business spending.
Furthermore, the best tax software can identify and calculate deductions. It can also generate your quarterly estimated tax forms for the next year. Both tax and accounting software can connect you with certified professional accountants (CPAs) for hands-on help and explanations.
6. Calculate your taxes yourself as a fallback
Software can save you time, but it’s only as accurate as the information you enter into it. You should also use your spreadsheets, tax rates and deductible information in this guide to calculate your taxes yourself. If you encounter any discrepancies, you may need to double-check your information or hire a professional.
Get ready to save on your taxes
With the right systems in place, you can minimize the amount of time you spend organizing your paperwork and crunching numbers come tax season. Software is a huge step in the right direction, and professional help may be worthwhile as well. The more proactive you are about your taxes, the easier they’ll be to pay.