When I decided to leave my nine to five job and work freelance, I knew I’d have to figure some things out when tax time came around. Namely, how much can you earn as a freelancer before paying taxes? As a CPA, I thought I’d be able to navigate the new-to-me world of self-employment taxes easily.
I was wrong — there’s a surprising amount of misinformation out there that had me totally confused on more than one occasion.
There’s a common misconception that if you earn under a certain amount you won’t have to pay tax on your freelance income. If you earn more than $400 freelancing, you’ll have to file Schedule SE and pay self-employment tax. But even if you earn less than $400, you’re still required to report (and possibly pay) income tax on the money you earn.
New to freelancing and need to learn the tax ropes? Let’s walk through everything you need to know about self-employment and taxes:
What is self-employment tax?
There are a lot of perks that come from being a freelancer. Unfortunately, taxes are not among them.
To understand self-employment tax, let’s first cover how taxes work when you are an employee. When you’re an employee, in addition to any income taxes you pay, you and your employer pay payroll taxes on your earnings, made up of social security and medicare taxes. The Social Security tax rate is 12.4% and the Medicare tax is 2.9%, so most are taxed a total of 15.3%.
When you’re an employee, you pay half of the payroll tax and your employer pays half.
But when you’re a freelancer you don’t have an employer to pay half of your payroll taxes. Instead, the IRS requires that you pay self-employment taxes. This is basically the same as the payroll taxes you’d pay if you were an employee, but now as a self-employed person, you have to pay both the employer and the employee portion. The entire 15.3% needs to be paid by you.
This rate can adjust a little depending on how much you make, but for now, what’s important to know is that you’re fully responsible for the self-employment tax.
How much can earn freelance before paying taxes?
There are two taxes you’ll need to pay as a freelancer: self-employment tax and income tax. What if you didn’t really earn that much from self-employment — do you still have to pay taxes?
Yes, probably.
If you earn at least $400 for your freelancing, you’ll be on the hook to pay self-employment tax and file Schedule SE.
To be clear, you only have to pay self-employment taxes on your self-employment income. Say you have a full-time job paying $75,000 and also have a side hustle paying $2,000. You’ll only be required to pay self-employment taxes on the $2,000 because you’ve already paid payroll taxes on the income from your full-time job.
As far as income tax, you’re required to report any income you make — there is no minimum threshold. Whether you have to pay taxes on that income depends on your income tax bracket and how much money you earn in a year.
When (and how) do I pay self-employment tax?
The US has a pay as you go tax system, meaning you need to pay taxes regularly throughout the year instead of paying them all at once. As an employee, your employer makes tax payments regularly for you. As a self-employed person, you’ll need to make estimated tax payments.
These estimated tax payments are due at four intervals throughout the year: April 15, June 15, September 15, and January 15. If any of those days fall on a weekend or holiday, the due date is the next business day.
You make estimated tax payments using Form 1040 ES to estimate and pay your taxes. In there you’ll find a worksheet to help you calculate your self-employment taxes that are due.
Do I have to report income under $600?
This was the other misconception I found — many people believed that if you earn less than $600, you won’t have to pay income tax on it.
It’s easy to understand where this misconception comes from: if you make less than $600 the person that paid you doesn’t need to file a 1099-MISC. But that has nothing to do with whether you have to actually report the income on your tax return. Even if you don’t receive a 1099-MISC, any income that you earn needs to be reported on your income tax return.
How much can you earn from your hobby without paying taxes?
What if you’re not freelancing, but you earn money from a hobby? Unfortunately, the rules are still the same. Any income that you earn will need to be reported and if you earn more than $400 you’ll need to file a tax return and pay taxes.
How can you reduce how much you pay on your freelance income?
While taxes are kind of a bummer for freelancers, there is a silver lining. Tax deductions can be your best friend to help reduce the amount of tax you pay. Tax deductions reduce your taxable income.
Some of the most common tax deductions for freelancers include:
- Home office tax deduction
- Travel expenses
- Business meals
- Advertising and marketing
- Office supplies
- Computer hardware and software
Keep those receipts during the year to make sure you’re getting the deductions that are allowed.
Bottom line
There are two taxes you need to be concerned with: income tax and self-employment tax.
If you earn any amount of money from freelance work, you will likely need to report it and pay income tax on it. If you earn at least $400 from freelance work, you will have to pay self-employment taxes on it.
