Do I Have to Report Freelance Income?

All income earned as a freelancer is considered taxable by the Internal Revenue Service (IRS) and must be reported. This income is subject to two forms of taxation: income tax and self-employment tax. Income tax is the same tax that employees pay on their wages. Self-employment tax is a combination of Social Security and Medicare taxes, for which freelancers are responsible for both the employee and employer portions.

Determining Your Reporting Requirement

The requirement to report freelance income is determined by specific earnings thresholds. If your net earnings from all self-employment activities total $400 or more for the year, you are required to file an income tax return. This rule applies regardless of whether you receive tax forms from clients, as all self-employment income is taxable and must be reported.

Clients who pay you $600 or more during the year are generally required to send you a Form 1099-NEC, Nonemployee Compensation. Similarly, if you receive payments through a third-party payment network, you might receive a Form 1099-K. For the 2024 tax year, the threshold for receiving a 1099-K is for payments totaling $5,000 or more. This is part of a phased plan, and the threshold is expected to change in the future.

It is also important to distinguish between a business and a hobby. The IRS has several factors to determine if an activity is a business, including if you operate in a businesslike manner and have a profit motive. If an activity generates a profit in at least three of the last five years, it is generally presumed to be a business. Hobby income is also taxable, but the rules for deducting expenses are different and less favorable than for a business.

Calculating Your Taxable Freelance Income

Your tax liability is based on your net earnings, not your gross income. The basic formula for calculating your taxable freelance income is Gross Income minus Allowable Business Expenses, which equals your Net Earnings. Keeping meticulous records of both your income and expenses is fundamental to accurately calculating this figure and ensuring you only pay tax on your actual profit.

A wide range of expenses can be deducted as long as they are both “ordinary and necessary” for your business.

• Home office expenses, calculated using either a simplified method of $5 per square foot (up to 300 square feet) or a regular method based on the percentage of your home used for business.
• Office supplies, such as paper, pens, and other materials directly related to your work.
• Software and subscriptions used for your business, as well as marketing and advertising costs incurred to promote your services.
• Business travel expenses, including transportation and lodging for client visits or industry conferences.
• Costs of professional development, such as classes or certifications that enhance your business skills.

Required Tax Forms for Reporting Income

To report your freelance income, you will work with several tax forms. The forms you receive, such as Form 1099-NEC and Form 1099-K, are informational returns that report the income paid to you by clients or through payment settlement entities. You will use the information on these forms, along with your own records, to report your total gross income.

The form for reporting your business’s financial activity is Schedule C, Profit or Loss from Business. On this form, you will list your total gross income from all freelance work and then subtract your various deductible business expenses. The result of this calculation is your net profit or loss.

Your net profit from Schedule C is then carried over to Schedule SE, Self-Employment Tax. This form is used to calculate the amount of Social Security and Medicare taxes you owe. The self-employment tax rate is 15.3% on 92.35% of your net earnings. The final self-employment tax amount calculated on Schedule SE is then reported on your main Form 1040, your individual income tax return.

Paying Your Freelance Income Taxes

The U.S. tax system operates on a pay-as-you-go basis, requiring you to pay taxes on freelance income throughout the year. If you expect to owe $1,000 or more in tax for the year, you generally must make quarterly estimated tax payments. These payments are calculated using Form 1040-ES, Estimated Tax for Individuals, which helps you project your annual income and determine the appropriate payment amount for each quarter.

You can submit your estimated tax payments through several methods. IRS Direct Pay allows you to make payments directly from your bank account for free on the IRS website. The Electronic Federal Tax Payment System (EFTPS) is another free online system offered by the Treasury Department that can be used for any federal tax payment.

Alternatively, you can mail a check or money order with a payment voucher from Form 1040-ES. Making timely estimated payments is important to avoid potential underpayment penalties.