How to Report Upwork Income on Taxes as a Freelancer

Freelancing on Upwork provides flexibility and income opportunities, but it also comes with tax responsibilities that differ from traditional employment. Unlike a regular job where taxes are automatically withheld, freelancers must track their earnings and ensure compliance with tax laws. Failing to report income properly can lead to penalties or unexpected tax bills.

Understanding how to handle taxes as an Upwork freelancer is essential for staying compliant and maximizing deductions. Proper reporting ensures legal obligations are met while reducing tax liability.

Classification of Freelance Earnings

Income earned through Upwork is considered self-employment income, meaning it follows different rules than wages from a traditional employer. The IRS classifies it as business income, requiring freelancers to report total revenue before deductions. Since Upwork does not withhold taxes, freelancers must account for their full earnings when calculating taxable income.

Payments received from clients are categorized as gross income—the total amount earned before platform fees or expenses are deducted. For instance, if a freelancer earns $50,000 but pays $5,000 in service fees, the full $50,000 must be reported as income, with deductions applied separately.

Freelancers are also subject to self-employment tax, which covers Social Security and Medicare contributions. Unlike passive income from investments, freelance earnings are taxed at standard business rates.

Applicable Tax Forms

Freelancers earning income through Upwork must file specific tax forms. Upwork issues a 1099-K to those who receive over $20,000 in payments and have more than 200 transactions in a calendar year. This threshold, set under Section 6050W of the Internal Revenue Code, determines whether Upwork must report earnings to the IRS.

Even if a freelancer does not receive a 1099-K, they are still responsible for reporting all income. Bank statements, invoices, and Upwork’s transaction history serve as alternative documentation. Earnings must be reported on Schedule C (Form 1040), which details business income and expenses.

Schedule SE (Form 1040) calculates self-employment tax, covering Social Security and Medicare. The 2024 self-employment tax rate is 15.3%—12.4% for Social Security and 2.9% for Medicare. Those with net earnings exceeding $200,000 (single filers) or $250,000 (married filing jointly) must also pay an additional 0.9% Medicare surtax.

Self-Employment Obligations

Freelancers must manage federal, state, and local tax obligations. Some states, like California and New York, impose additional self-employment levies, while others, such as Texas and Florida, do not have a state income tax.

Certain states require freelancers to register as sole proprietors or obtain business licenses. For example, graphic designers selling digital templates may need to collect and remit sales tax. Some cities also impose local business taxes or require annual renewals.

Beyond income taxes, freelancers in states like California may need to contribute to state disability insurance programs. Washington state requires contributions to its Paid Family and Medical Leave program for those earning above a certain threshold. These obligations can be overlooked but have financial implications if not accounted for.

Deductible Expenses

Freelancers can lower taxable income by claiming business expenses. The IRS allows deductions for costs that are “ordinary and necessary” under Section 162 of the Internal Revenue Code. Tracking these expenses can significantly reduce tax liability.

Office Costs

Expenses related to maintaining a workspace are deductible. The home office deduction applies if a portion of the home is used exclusively and regularly for business. The simplified option allows a deduction of $5 per square foot, up to 300 square feet (maximum $1,500). The actual expense method requires tracking costs like rent, mortgage interest, utilities, and depreciation.

Coworking space memberships are deductible if used for business purposes. Office supplies, including computers, printers, and software, also qualify. Under Section 179, freelancers can deduct the full cost of equipment in the year of purchase, up to $1,220,000 for 2024. Keeping receipts and maintaining a log of business use is essential for substantiating these claims.

Service Fees

Upwork charges freelancers a service fee based on lifetime billings with each client—10% for earnings up to $10,000 and 5% for amounts exceeding that threshold. These fees are fully deductible as a business expense.

Payment processing fees from services like PayPal or Payoneer also qualify as deductions. Currency conversion fees for international payments may also be deducted if directly related to business transactions.

Professional Assistance

Hiring accountants, tax preparers, or legal professionals for business operations is deductible. Fees for tax preparation services, bookkeeping software like QuickBooks, or financial consultations can be claimed on Schedule C.

Legal fees related to contract reviews, intellectual property protection, or business formation also qualify. For example, if a freelancer hires an attorney to draft service agreements, those costs can be deducted. However, legal expenses for personal matters, such as drafting a will, are not deductible. Keeping invoices and engagement letters from professionals helps substantiate these deductions.

Estimated Tax Payments

Freelancers must pay estimated taxes throughout the year rather than waiting until the annual filing deadline. The U.S. tax system operates on a pay-as-you-go basis, meaning self-employed individuals must make estimated tax payments if they expect to owe at least $1,000 after subtracting withholding and refundable credits.

Estimated taxes are due quarterly—April 15, June 15, September 15, and January 15 of the following year. Missing these deadlines can result in penalties. The IRS Form 1040-ES provides worksheets to estimate tax liability based on projected earnings and deductions.

Many freelancers use the safe harbor rule to avoid penalties by paying at least 90% of the current year’s tax liability or 100% of the prior year’s total tax bill (110% for high-income earners exceeding $150,000).

To simplify payments, freelancers often set aside 25-30% of each payment into a separate tax savings account. The IRS Direct Pay system and the Electronic Federal Tax Payment System (EFTPS) allow easy submission of estimated payments. Some states also require quarterly payments for state income tax, making it important to check local regulations.

Recordkeeping and Documentation

Maintaining accurate financial records is necessary for tax reporting and maximizing deductions. The IRS requires self-employed individuals to keep documentation supporting income and expenses. Poor recordkeeping can lead to audits, penalties, or disallowed deductions.

Income records should include invoices, bank statements, and payment processor reports. Upwork provides a transaction history detailing earnings, service fees, and withdrawals, which can serve as primary documentation. Freelancers should reconcile these records with bank deposits to ensure accuracy.

Expense documentation is equally important. Deductions must be supported by receipts, invoices, or bank statements. Accounting software like QuickBooks, FreshBooks, or Wave can help track expenses and generate reports. The IRS generally requires records to be retained for at least three years, though underreported income exceeding 25% of total earnings may require keeping documents for up to six years.

Proper recordkeeping simplifies tax preparation and provides financial clarity for business planning.