Self-Employed Tax Questions: How Does Freelance Income Affect Your Taxes?

Do you make money as a freelancer? Whether you make a living as a full-time freelancer or just do it part-time, what are the tax consequences of this income? This article will answer that question.

For tax purposes, a freelancer is treated as an independent contractor, aka a “sole proprietor” or a “self-employed person”. That means your freelance income and related expenses are reported on Schedule C of your personal income tax return. If your income exceeds expenses, the net profit is subject of both income tax and self-employment tax. If your expenses exceed income, the loss becomes a deduction that can offset other sources of income.

Now that you are a sole proprietor in the eyes of the IRS, your personal tax return just got much more complicated. As mentioned above, you must include Schedule C as part of your Form 1040. If you have profit subject to self-employment tax, you must file Schedule SE to calculate that self-employment tax. If you purchase office equipment such as a computer or a printer that you use in your freelancing, you must report those purchases on Form 4562 and deal with the complex depreciation rules or the Section 179 deduction, which entitles you to deduct 100% of the cost in the year of purchase (assuming you use the equipment 100% for your freelancing activities). And if you take the home office deduction, you must file Form 8829.

If your freelancing work and related expenses are fairly simple, then you may be able to file Schedule C (or the less intimidating Schedule C-EZ) with just a few numbers and be done with it. But if you want take advantage of the many tax deductions available to independent contractors, you should give serious consideration to hiring a tax professional well versed in the world of self-employment taxation.

To get a good overview of the many deductible expenses you’re entitled to write off, take a look at Schedule C – it has a good list of many common deductions. There are also some excellent free resources at the IRS website for freelancers – start here:
http://www.irs.gov/businesses/small/selfemployed/index.html. Publication 334, Tax Guide for Small Business (For Individuals Who Use Schedule C or C-EZ) is another great resource available at the IRS website.

One final comment: Depending on the amount of your freelance income, you may be required to make quarterly estimated tax payments to both the IRS and your state. This possibility is another reason to get help from a tax pro. The rules regarding estimated tax payments are not for the numerically challenged, so you may not want to tackle them on your own.

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