Tax Season Resource
How to File Taxes as a Freelancer
There’s no question: Working for yourself has a plethora of perks.
Self-employment taxes can put a damper on even the shiniest of #girlboss dreams. If it’s your first year tackling them, grab a cup of coffee and read up.
Because whether you’re driving for Uber or freelancing as a social media marketer, you’ll need to know these basics of filing taxes when you’re self-employed.
Chime does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
What is self-employment tax?
When you work a regular job, your employer takes your taxes out of your paycheck for you. But when you become your own boss, you take on that responsibility for yourself.
The self-employment tax rate, for instance, is 15.3%, of which 12.4% goes to Social Security and 2.9% goes to Medicare. If that seems higher than what you paid as an employee, you’re not imagining things. When you work for someone else, you and your employer split those taxes down the middle, with each of you paying 7.65%.
But when you’re self-employed, the Internal Revenue Service (IRS) considers you both the employer and the employee, meaning you get to pay the whole shebang yourself. (You can, however, deduct the employer portion from your taxable income.)
That 15.3% isn’t all you’ll have to pay, either; it’s in addition to your federal, state, and city income taxes.
As a rule of thumb, Amie Kuntz, a certified public accountant and tax senior manager at Eide Bailly, says freelancers should set aside 30% of their income for taxes.
However, she notes, “the actual amount owed may differ based on a number of factors, including overall business profit or loss, a potential qualified business income deduction, and whatever else the taxpayer has going on in terms of other income, deductions, or credits.”
Who has to pay self-employment taxes?
According to the IRS, “You must file a tax return if you have net earnings from self-employment of $400 or more from gig work, even if it’s a side job, part-time or temporary.” That includes pet-sitting through Rover, mowing lawns with TaskRabbit, or virtual assistant-ing on Upwork.
The tricky thing is, unlike the W2s sent by every employer, you might not receive any gig or freelance tax forms in the mail.
When you’re an “independent contractor,” companies only need to send you a 1099-MISC if they paid you more than $600 during the year. If they sent your payments via PayPal, they only need to send a 1099-K if they paid you more than $20,000 or more than 200 times.
But no form ≠ no taxes. “The biggest misunderstanding is if you don’t get a 1099, you don’t have to report it on your tax return,” says Rosalind W. Sutch, a certified public accountant and shareholder at Drucker & Scaccetti.
While it’d be nice to ignore any income that was unaccompanied by 1099s, it’s illegal. As a self-employed person, you need to track and record your earnings — and report them on your tax return, even if you don’t get a form in the mail.
5 tips for filing your self-employment taxes
Now that you understand what self-employment taxes are and who has to pay them, here’s a handful of tips that can make the process a little less painful.
1. Separate your financial accounts
One common self-employed tax mistake — which, according to Sutch,“causes way more hassle than is necessary” — is failing to separate your business and personal expenses.
“It’s a lot easier to go through a couple [business] transactions a month than to go through them when all of your personal expenses are mixed in,” Sutch says. “So I recommend you start from day one: Open up a separate bank account and separate credit card, and use them exclusively for business purposes.”
Don’t worry, however, about opening an official “business bank account” or “business credit card.” You can use a regular checking account and credit card for your business; all that matters is they’re separate from your personal accounts.
2. Track expenses
A study from Xero found that 25% of freelancers struggle to track their expenses — and that 73% don’t deduct any expenses at all. Don’t let this be you!
When you don’t deduct business expenses from your taxes, you’re essentially giving a free donation to the federal government. Which is nice and all… but wouldn’t it be better to have some more money in your travel fund instead?
As a self-employed person, the IRS lets you deduct the cost of any “ordinary and necessary” expenses for your business. If you drive for Lyft, for instance, this could include gas, parking fees, car repairs, and insurance.
Just make sure you keep your receipts. While you won’t need to furnish them when you file, you will need them if you’re audited (and no, credit card statements don’t count). These days, many online accounting programs come with apps that allow you to easily scan receipts from your phone.
“It’s really important that freelancers understand they need to keep good records,” Kuntz says. “If you don’t have good records and you get selected for audit, you could have disallowed expenses.”
3. Save 30% of your income
The most painful experience for any new freelancer or side hustler is forgetting to set aside money for taxes, then getting hit with a huge bill in April.
Sutch frequently sees this with her clients. “They think they’ll save later from those later earnings,” she says, “but then those dollars are gone and they don’t have the money to pay their taxes when they are due.
To avoid this unpleasant scenario, create a separate, fee-free online bank account for your taxes. (Yep, another one, in addition to your personal and business checking accounts). At the end of every week, transfer 30% of your earnings from your business checking account to your tax savings account.
While that might sound high, keep in mind you need to cover both your self-employment tax (15.3%), your federal income tax (see the brackets here), and your state tax. If you or your spouse has a high income, or if you live in a high-tax state, such as New York or California, or high-tax city, such as NYC, then you might want to set aside even more.
Fantastic digital tools for freelance taxes
4. Make estimated payments
When you work a regular job, the IRS gets a chunk of your paycheck every two weeks. When you’re self-employed (and paycheck-free), it’s left out of the loop. The IRS doesn’t like being left out of the loop, which is why you need to pay taxes four times a year.
That’s right: If you’re self-employed and anticipate owing more than $1,000 in taxes for the current year, you’ll need to make quarterly “estimated payments” to cover your tax burden.
Here are the deadlines:
- April 15, for income earned from January 1 through March 31
- June 15, for income earned April 1 through May 31
- September 15, for income earned June 1 through August 31
- January 15, for income earned September 1 through December 31
Then, set quarterly reminders on your calendar, and a few days before each due date, transfer money from your tax savings account (told you that’d come in handy) to the IRS via the Electronic Federal Tax Payment System.
5. Don’t be afraid to get help
If you’re not prepared, taxes can quickly turn your self-employment dream into a nightmare.
So while this guide is a start, it isn’t meant to replace the advice of a professional. If you have questions or feel overwhelmed, search online for a reputable accountant. Or check out the IRS’s new Gig Economy Tax Center, which is a good resource, too.
And if you’ve ended up with a tax bill you can’t pay, don’t panic. File your taxes before April 15, and contact the IRS to discuss payment plans.
Whatever you do, just take it one step at a time — you got this! 💪🏼
Questions? Check out our FAQ
Or go to chime.com/taxes for more.
At Chime, we’ve created a new approach to online banking that doesn’t rely on fees2 , gets you your paycheck up to 2 days early with direct deposit1 , and helps you grow your savings automatically. When you open a bank account through Chime, you get a Visa Debit Card® and a Checking Account that can be managed entirely from your smartphone, plus an optional Savings Account that helps you grow your savings automatically! The Chime mobile banking app is available on both Android and iOS.
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A tax refund may only be direct deposited into an account that is in your name. Just make sure the name of the primary filer listed on your tax refund is the exact same name listed on the Chime Checking Account you are depositing to.
Important: If the primary filers name doesn’t match the name on the Chime Checking Account it is being deposited, the deposit will be rejected and returned to the IRS. No more than three electronic refunds can be deposited into a single financial account or prepaid card. If you exceed this limit, you will receive a notice from the IRS and a paper check refund.
I’m expecting a large tax refund. Are there any limits to the amount I can deposit using direct deposit?
You can make a direct deposit of any amount into your Chime Checking Account; but deposits over $10,000 may require additional verification. We’ll send you an email and a push notification (if enabled on your mobile device) as soon as your deposit arrives!
Sometimes. Unfortunately, we cannot currently guarantee that our Mobile Check Deposit feature will accept all tax refund checks⁴ due to their unique shape, color, and markings.
Learn more about Mobile Check Deposit⁵ limits in your Deposit Account Agreement here. Please view the back of your debit card to identify your issuing bank.
We can’t guarantee that your tax refund will deposit earlier than the estimated date provided by the IRS. That said, we’ll always post your tax refund to your account as soon as we receive it!
Direct deposit is the easiest way to deposit your tax refund into your Chime Checking Account. Whether you file online or on paper, all you need to do is enter your Chime Checking Account Number and Routing Number where prompted.
You can find your Checking Account Number and Routing Number in the Chime app! Just go to Settings > Account Information!