A practical guide to setting up your tax system as a freelancer, covering self-employment tax, quarterly payments, deductions, record-keeping, and year-end filing.
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Understand Your Tax Obligations
Learn the self-employment tax rate and threshold
You owe self-employment tax (15.3%) on net earnings above $400 per year. This covers Social Security (12.4% on income up to $168,600 in 2024) and Medicare (2.9% on all income). You pay both the employer and employee portions.
Identify which federal tax forms you will file
Freelancers file Schedule C (profit/loss), Schedule SE (self-employment tax), and Form 1040-ES (quarterly estimated payments). If you earn over $600 from a single client, they must send you a 1099-NEC by January 31.
Schedule C for business income and expenses
Schedule SE for self-employment tax calculation
Form 1040-ES for quarterly estimated tax payments
Check your state's income tax requirements for freelancers
41 states plus D.C. have state income tax. Some cities (New York, Philadelphia, Detroit) also charge local income tax on freelance income. Check if your state requires separate quarterly estimated payments.
Set Up Quarterly Estimated Payments
Calculate your estimated quarterly tax payment amount
Use the IRS Form 1040-ES worksheet. A quick estimate: multiply your expected net income by 30% (federal income tax + self-employment tax) and divide by 4. Adjust each quarter based on actual earnings.
Set calendar reminders for payment due dates
Federal quarterly payments are due April 15, June 15, September 15, and January 15. If a due date falls on a weekend or holiday, the deadline moves to the next business day. Late payments incur a penalty of about 8% annually.
Choose a payment method for estimated taxes
Pay online through the IRS Direct Pay system (free) or EFTPS (free, but requires enrollment). Credit card payments are accepted but add a 1.85-1.98% processing fee. Direct Pay is the fastest — payments post the same day.
Open a dedicated savings account for tax reserves
Transfer 25-30% of every payment you receive into this account immediately. This removes the temptation to spend money earmarked for taxes. A high-yield savings account can earn 4-5% APY on your tax reserves while you wait to pay.
Track Income and Expenses
Set up a system to record all income when received
Record every payment on the day you receive it, including cash, checks, and electronic transfers. The IRS matches your reported income against the 1099-NECs your clients file — discrepancies trigger audits.
Create expense categories that match Schedule C
Schedule C has 20 specific expense categories including advertising, car expenses, insurance, office expenses, supplies, and travel. Setting up matching categories now means your year-end tax prep takes hours instead of days.
Set up categories for advertising, supplies, and utilities
Set up categories for travel, meals, and insurance
Establish a receipt storage system
Photograph or scan every business receipt and save it digitally with the date, amount, and category. The IRS requires records for 3-7 years. A shoebox of paper receipts is risky — a phone photo organized by month works better.
Track business mileage from day one
The standard mileage deduction is 67 cents per mile (2024). For a freelancer driving 10,000 business miles per year, that is a $6,700 deduction. Log the date, destination, purpose, and miles for each trip. Digital mileage tracker apps automate this.
Know Your Deductions
Calculate your home office deduction
The simplified method allows $5 per square foot, up to 300 square feet ($1,500 max). The regular method deducts a percentage of actual home expenses based on your office's proportion of total square footage. The regular method yields more if your home costs are high.
Deduct the employer portion of self-employment tax
You can deduct 50% of your self-employment tax as an above-the-line deduction on your 1040. This reduces your adjusted gross income. On $100,000 of net income, this saves you roughly $1,100 in income tax.
Claim the qualified business income (QBI) deduction
Most freelancers can deduct 20% of their qualified business income. On $80,000 of net income, this is a $16,000 deduction. The deduction phases out for single filers above $191,950 and married filers above $383,900.
Deduct health insurance premiums if self-employed
You can deduct 100% of health, dental, and long-term care insurance premiums for yourself, your spouse, and dependents. This is an above-the-line deduction, meaning it reduces your taxable income even if you do not itemize.
Track equipment and software purchases for depreciation
Under Section 179, you can deduct the full cost of business equipment and software in the year purchased, up to $1,220,000 (2024 limit). A $2,000 laptop used 80% for business yields a $1,600 deduction in year one.
Year-End Tax Preparation
Reconcile all income against 1099-NEC forms received
Compare your income records to every 1099 you receive by January 31. Report all income even if a client did not send a 1099 — the IRS still expects you to report payments under $600. Discrepancies are the top audit trigger for freelancers.
Finalize and categorize all business expenses
Review bank and credit card statements for any missed deductions. Common overlooked deductions include professional subscriptions ($200-$500/year), continuing education, and business-related bank fees.
Consider contributing to a retirement account before the deadline
A SEP-IRA allows contributions up to 25% of net self-employment income (max $69,000 for 2024). You can open and fund a SEP-IRA up until your tax filing deadline (April 15, or October 15 with an extension).
Decide whether to file yourself or hire a tax professional
If your freelance income is under $50,000 with simple deductions, tax software costs $50-$120 and handles Schedule C well. Above that, or with complex situations (multiple states, international income), a CPA costs $300-$800 and often finds deductions that cover their fee.
Frequently Asked Questions
How much should a freelancer set aside for taxes?
A safe target is 25-30% of gross income for most freelancers. This covers the 15.3% self-employment tax (Social Security + Medicare) plus federal income tax at your bracket rate. If you live in a state with income tax (like California at 9.3% or New York at 6.85%), bump it to 30-35%. Open a separate savings account and transfer the percentage with every payment you receive.
When are quarterly estimated taxes due?
The four due dates are April 15, June 15, September 15, and January 15 of the following year. If a due date falls on a weekend or holiday, the deadline shifts to the next business day. Missing a payment triggers an underpayment penalty of roughly 8% annualized interest on the shortfall. You can use IRS Form 1040-ES or the IRS Direct Pay system to submit payments.
What can freelancers deduct on their taxes?
Common deductions include the home office ($5 per square foot up to 300 square feet for the simplified method), internet and phone (business-use percentage), health insurance premiums (100% above-the-line deduction), software subscriptions, professional development, travel for client meetings, and retirement contributions (SEP IRA allows up to 25% of net earnings, maxing at $69,000 for 2024). Deductions reduce both income tax and self-employment tax.
Do I need to file taxes if I made less than $600 freelancing?
Yes, if your net self-employment income exceeds $400 in a year. The $600 threshold only applies to the 1099-NEC reporting requirement — clients must send you a 1099 if they paid you $600 or more, but the IRS requires you to report all income regardless of whether you receive a 1099. Even small amounts of freelance income are subject to self-employment tax.
Should a freelancer form an LLC or S-Corp for tax purposes?
An LLC alone does not change your tax situation — single-member LLCs are taxed identically to sole proprietorships. The tax benefit comes from electing S-Corp status (IRS Form 2553), which lets you split income between a reasonable salary (subject to payroll taxes) and distributions (not subject to self-employment tax). This typically saves money when net profit exceeds $60,000-$80,000 per year. Below that threshold, the extra payroll costs and accounting fees ($1,000-$3,000 annually) usually outweigh the savings.