Tax tips for freelancers in 2023: 8 smart ways to file
If you’re one of the 70.4 million people who took on some form of freelance work or a side gig last year, you may have some tax benefits coming your way (hello, business-expense deductions!).
Here are top tax tips you should know as you prepare your 2022 return and as you look toward next year.
1. Know what's taxable income
With any type of income, Uncle Sam wants you to pay taxes on it as you receive it throughout the year. Freelancers, gig workers, and the self-employed usually receive 1099-NEC forms to help them report job income. You’ll also owe self-employment tax: 12.4% to Social Security and 2.9% to Medicare, for a total of 15.3%.
If you received unemployment benefits in 2022, your state should send you a Form 1099-G with the details of how much income you accepted from the program. Your state may have withheld taxes for you, too. But if they didn’t take out enough, you may owe the Internal Revenue Service. (More on that below.)
2. Know what's not taxable income
If you had student loan debt forgiven recently, here’s some good news: “The American Rescue Plan Act of 2021 made any discharge of student loan debt between 2021 and 2025 excludable from taxable income,” says Ben Henry-Moreland, a certified financial planner who specializes in working with freelancers.
This may apply if you had federal student loan debt forgiven through income-driven repayment plans or the Public Service Loan Forgiveness program. The same goes if the Biden Administration erases any of your student loan balance, Henry-Moreland says.
“However, some states might still count forgiven student loans as taxable income,” Henry-Moreland adds, so check your state rules when preparing your taxes.
3. Deduct business expenses
Businesses can deduct business expenses if they’re an “ordinary and necessary” part of running your business. That goes for all self-employed workers, from Uber drivers to freelance writers and Amazon shoppers. Publication 535 provides all the information you’ll need to know about deducting expenses such as :
Transportation
Health insurance
Supplies used for your business
The self-employment tax
Retirement plan contributions
But don’t go overboard here. You can only deduct the portions of these expenses that are related to your freelance work, per the IRS. For example, let’s say you use your cellphone for work 25% of the time as an Uber driver. That means you can deduct 25% of the cost of your cell phone plan on your taxes.
4. Take advantage of your home office
You can also take a home office deduction if your office space at home is exclusively used for business on a regular basis. It doesn’t even need to be a separate room. A corner of a room with a desk and chair suffices if its exclusive use is for your business.
As part of this deduction, you also can deduct some of your mortgage interest, insurance, utilities, repairs, and depreciation for that area. To figure out how much to write off, use one of the two formulas:
Simplified option: Deduct $5 per square foot — up to 300 square feet — of the part of your home that’s used for your business.
Regular method: Calculate the percentage of your home’s floor space that's used for business and apply that to qualifying expenses.
5. You have options if you’re facing a tax bill
If you owe money to the IRS, you should still file your income tax return on time, which is April 18 this year. Your tax bill is also due by this deadline, and if you don’t address it, “you’ll still pay interest and late fees for as long as you have outstanding tax,” said Ben Henry-Moreland, a certified financial planner who specializes in working with freelancers.
Fortunately, you might be able to work out a payment plan with the IRS. Your main options include:
A short-term extension where you pay the bill up to 180 days after the original deadline.
An installment agreement that allows you to pay the bill over a longer period of time.
A reduced tax balance if you can’t pay the full amount.
A delay collecting the amount you owe until you can pay.
6. Calculate next year's quarterly tax payments
To avoid paying underpayment penalties, freelancers should pay quarterly tax payments throughout the year since they don't have paycheck withholdings.
Use Form 1040-ES, Estimated Tax for Individuals, to calculate these tax payments. Use your most recent tax return to help fill it out. But don't get too concerned if your calculations are a little off. You can lower your payment for the next quarter if you paid too much in taxes in the current quarter. If you paid too little, increase your payment next year.
Form 1040-ES includes blank vouchers for mailing tax payments. Or, you can make payments through the IRS Direct Pay site or through the Electronic Federal Tax Payment System (EFTPS).
7. Contribute to a retirement account
When you put money into a traditional IRA, it’s tax-deductible in the year you make the contribution (as long as you meet requirements). This could lead to a lower tax bill next year. If you haven't filed your 2022 taxes yet, there's still time to save. You can make IRA contributions for the 2022 tax year until April 18, 2023.
8. Get organized
Keeping receipts and organizing your tax documents will make it easier to figure the correct deductions “and be more likely to withstand an IRS audit,” Henry-Moreland said. Need some guidance? The Internal Revenue Service set up a Gig Economy Tax Center to help you understand relevant tax forms and freelance topics like estimated taxes, filing requirements, deductible business expenses and more.
Kim Porter is a freelance writer and editor.
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