Freelancing isn’t all sweatpants and snooze buttons.
Well, sometimes it is. But most of the time, it’s cabin fever, caffeine withdrawal, fickle cash flows, and fierce competition for clients.
Being your own boss is really hard work — and no time is that more apparent than during tax season.
Compared to those with a typical 9-to-5 job, freelancers, independent contractors, and other self-employed workers face a unique set of challenges when it comes to filing an annual return. For one thing, you need to maintain year-round business records that are separate from your personal ones to make sure you’re organized once tax season rolls around. You’re also responsible for making and keeping track of estimated tax payments each quarter, since the money isn't automatically deducted from your paychecks throughout the year. Fail to pay enough tax by each payments' due date, and you might be penalized — even if you're owed a refund when you file your return.
Oh, and don’t forget about the whopping 15.3% federal self-employment tax you’re required to pay if you earned at least $400 from your freelance work (maxing out at $168,600). Sure, it goes toward Social Security and Medicare which is cool for Future You — probably, maybe? — but not so fun for Current You.
Since tax evasion is sort of a felony, filing your return every year is in your best interest. However, simply filing your taxes is not enough. If you try to figure it all out on your own, you could still be hit with costly penalties and interest if you make a mistake. On the other hand, you could always go to a CPA and have them take care of your income tax return for you, but their fees could burn a hole in your pocket, too.
For a happy medium between the two, consider picking up some tax software.
What is tax software?
Tax software is a type of software program that’s designed to guide users through the process of preparing and filing their returns, helping them comply with tax laws while identifying any deductions and credits that may be available. Essentially, it’s software that makes it less taxing to do your own taxes.
Back in the day, tax software came in the form of a CD-ROM that could be downloaded to your desktop computer. (How retro.) Nowadays, you can just download a program from a trusted tax prep company’s website. Or, even better, some tax preparation tools are available completely online or via mobile app for maximum convenience.
What should you look for in a tax software program?
"Freelancer" is synonymous with "self-employed business owner" in the eyes of the IRS (more specifically, "sole proprietor" or "independent contractor"), so you'll be reporting your business income and expenses on a Schedule C and your self-employment tax on a Schedule SE; include both with your Form 1040, the standard individual tax filing form. The tax software you use will definitely need to support that paperwork along with Form 1099-NEC, the non-employee income document you get from your clients instead of a W-2.
You may also receive a Form 1099-K from a third-party payment network like Venmo or PayPal if your client(s) paid you at least $5,000 that way, though some states' thresholds are lower. Note that this doesn't apply to any transactions between you and your family or friends.
Other good-to-have features include:
An intuitive e-filing process with straightforward questions and prompts
Some sort of accuracy and maximum refund guarantees
Solid customer support, with optional access to a real live tax expert in case of emergency
Don’t forget that you’ll also need to file your state taxes in addition to your federal taxes (unless you live somewhere with no income tax — see Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming). Some tax software providers will include one state for free, but most will charge you per state where you need to file.
Also, keep in mind that the cheapest tax software option isn’t necessarily the best tax software option. The program you choose should be robust enough to handle complicated tax situations and sniff out tons of possible deductions, and also willing to promise a high-ish level of protection in case you’re audited. In other words, now’s not the time to get stingy: You want to get your taxes done, but also done right. That’s not to say you should pay for features you don’t need, but just make sure your bases are covered.
What can freelancers write off on their taxes?
Speaking of deductions: The one big thing freelancers have going for them during tax season is the fact that they can write off way more work-related expenses than the average employee — that includes office supplies, mileage, a chunk of your internet bill, payment processing fees, and the portion of your rent that covers your home office. Don't get too brazen, though: These expenses must be "both ordinary and necessary" to your business, per the IRS. (So you couldn't write off a just-for-fun road trip, for example.)
Is it worth it to have an accountant do your taxes?
If you have a pretty straightforward tax situation, if you already have a few years of filing as a freelancer under your belt, and/or if you make under $84,000 a year, you may be able to get away with a free filing option through the IRS' Free File program. However, many freelancers are going to have complicated-enough tax situations to warrant a paid software solution with premium features and built-in support from seasoned tax professionals. Budget for around $105 for your federal return and about $50 for every state return.
This is all to say that you probably don't need to splurge on a real, live CPA, but that's always an option if you don't feel great about filing on your own. "I’ve seen [small] business owners save thousands in taxes because a bookkeeper ensures everything is categorized properly and ready for the CPA to review," one financial planner told Mashable.
According to a National Society of Accountants survey, the standard U.S. firm charges an average of $343 for an itemized Form 1040 with a state return and $220 for a non-itemized Form 1040 with a state return, plus $192 for a Schedule C and $41 for a Schedule SE. Most will also bill you for 1099s ($67.72 on average) and disorganized or incomplete files ($165.82 on average).
What’s the best tax software for freelancers?
Here are the software options with Schedule C, Schedule SE, Form 1099-NEC, and Form 1099-K support that we recommend for the 2024 tax season (which gets filed in 2025).
