How to Manage Tax as a Freelance Editor
Freelancing offers a lot of freedom — it’s in the word — but liberty comes at a cost. In this case, the cost is having to handle your own income and tax. Thanks to the US tax code, managing this part of your business can get overwhelming if we don't quickly get to grips with the basics.
In this post, we'll show you how to effortlessly (and fearlessly) manage your taxes as a freelancer. By the end, you’ll be ready to live the dream and humblebrag to all your former colleagues about how the glaring sun makes it hard to see your screen when you work by the pool.
A disclaimer: none of us at Reedsy are accountants or tax professionals. This guide is meant to be a starting point for informational purposes only, and should not be a substitute for professional tax, legal, or accounting advice. We strongly recommend you supplement your knowledge of U.S. taxes with your own research or consult a professional accountant.
Freelance taxes at a glance
Handling taxes without the help of an employer can be intimidating, so we’ll lay it out simply for you. Once you know what needs to get done, we can dive into the details of how to actually do it.
As a freelancer, you are responsible for paying:
- Self-Employment (SE) Taxes:
- Social Security tax
- Medicare tax
- Income Taxes:
- Federal tax
- State tax
- Any local taxes
To do so, you will need to complete a handful of forms and submit tax estimates four times a year. Sounds simple enough, right? Now let’s get to the fine details.
How to manage your taxes as a freelance editor (in 8 steps)
Before dealing with the nitty-gritty of calculating and paying, gather the basic information you need moving forward: your forms, dates, and a few tools to help make all this a lot easier.
1. Collect the forms
Each quarter, freelancers must submit and pay tax estimates to the IRS. These estimates do not include deductions or income tax — they are simply quarterly payments to ensure that you pay tax accurately and regularly (and that you don’t incur an IRS penalty or a shockingly large surprise come tax day).
Each time you submit your quarterlies, you’ll need to fill out these forms:
- Form 1099-Misc — self-employers' version of the W-2
- Self-employers must send a 1099 to clients to fill out along with a contract — but only for work over $600
- Schedule C-EZ — calculates the Social Security Tax and Medicare Tax you owe
- Form 1040-ES — estimates exactly how much in taxes you owe
- EFTPS — allows you to pay quarterly tax estimates from your bank account
Since these forms essentially serve to estimate the taxes you owe, you may also use the previous year’s tax return in their place — so long as you think this year will be similar. If you overpay one year, the difference will be deducted on your next years’ tax responsibility. If you underpay, the difference will be charged, along with a separately figured penalty if you owe more than $1000.
We’ll get into how to pay them once we cover how to actually calculate what you’ll pay.
2. Know the dates
These are the dates you’ll need to know to submit your tax estimates and payments:
- Income received from Jan 1st - Mar 31st — estimate* & income tax due April 14th**
- Income received from Apr 1st - May 31st — estimate* due June 14th
- Income received from June 1st - Aug 31st — estimate* due September 14th
- Income received from Sept 1st - Dec 31st — estimate* due January 14th
*1040-ES and EFTPS submission
**the day before the cut-off date on the 15th of the month
3. Get an accounting app
There are many other means to keep track of and calculate your tax. Here, we’ll give the rest of the tools you’ll need, so you’re prepared for when things get trickier.
Experienced freelancers will often track their expenses in Microsoft Excel or Google Spreadsheets, or with other tools like Quickbooks, Turbotax, FreeAgent, and Freshbooks. However, for beginners who wouldn’t know where to start, there are a couple of helpful apps to give you a leg up.
Bonsai is a big one: it’s a tracking platform that helps freelancers track expenses, calculate taxes and provide invoice templates. SageOne is another accounting app targeted at small businesses and freelancers which offers similar services to Bonsai.
There’s also Cushion, another accounting app designed specifically for freelancers. It has slightly limited tax capabilities compared to Bonsai, but in addition to tracking time and monthly goals, it offers integration with accounting tools such as FreeAgent, FreshBooks, and Xero. If you’ve been using or still use those tools, you can import all your existing data into Cushion.
4. Set up separate accounts
We suggest having “Business” and “Tax” bank accounts, separate from your personal checking or savings. That way, you can clearly see what has been paid by a client, along with any business-related expenses. We suggest keeping roughly 30% of your income in the latter, so you don’t get slammed come tax day.
5. Calculate your self-employment taxes
Note: you can exit this post at any time by deciding to hire an accountant. We wouldn’t blame you: Taxes are known to cause migraines! (Ed: not a medical fact.)
However, if you’re sticking around, we’re here to show you how to do it yourself.
Four times a year, be sure to grab yourself one of those handy tax calculators we mentioned:
All you need to do for most of these is enter your total annual income. Once you input that, the calculator will spit out a figure for the Medicare and Social Security taxes that you need to pay.
Note: If you’re curious as to how these calculators determine this, it’s actually pretty simple: they basically calculate income x .9235 x .153. This is because, as a freelancer, only 92.35% of your total self-employment earnings are taxable — you are allowed to deduct the portion of taxes an employer would normally pay (7.65%). From there, 15.3% of that taxable amount will count as your self-employment taxes.
Finally, remember that you are only taxed for Social Security on up to $127,200, but the Medicare tax has no earnings limit. And, if your net profit was less than $400 in the full tax year from your freelance work, you pay none of this (you still need to file a tax return, though).
6. Pay your quarterly estimates
By now, you should have an idea of what you owe for your self-employment taxes. Unfortunately, it’s time to pay up. Here’s how to do so:
- Collect all your 1099 forms to figure out your revenue for the tax year
- Fill out your Schedule C-EZ (or Schedule C, if your annual expenses are over $5000) to report your income or loss
- The tax calculators and apps mentioned above will help, but if you’re still having trouble, these instructions will walk you through the process
- Fill out Form 1040-ES to report your Social Security and Medicare taxes
- Here are some helpful instructions for filling out the form
- File your 1040-ES with the IRS
- Include your income from freelance jobs (1099) as well as any regular employment (W-2) you might have had during the tax year
Remember, as a freelancer you should be paying self-employment taxes each quarter so that at the end of the year, you only have to worry about income taxes. We highly recommend using the Electronic Federal Tax Payment System (EFTPS) to stay on top of this.
7. Keep a running list of deductibles
Now for the bit we can all get behind: tax deductibles. Though your expenses cannot be deducted from your quarterly estimates, they can, of course, be deducted from your end of the year payment. Here is a list of some deductible business expenses for freelancers:
- A portion of rent if you work from home (the square footage of your workspace)
- A portion of internet and utilities
- The cost of visiting a freelance work hub or hangout
- Health insurance premiums
- Contributions to your retirement fund
- Phone call costs or Skype credits
- Software packages (Microsoft Office, Adobe Suites, etc.)
- Payment management system fees (Stripe, Paypal, etc.)
- Professional memberships (EFA, ACES, Linkedin Premium, etc.)
- Printers, paper, and ink (plus your scary red editing pen)
- Computer, laptop, or tablet (or the equivalent percentage of time you use it for work)
- The Reedsy freelancer commission fee
- And an accountant… though hopefully you no longer need one!
Businesses and employers deduct all of this, so you should too. Here is a comprehensive list.
8. Calculate and pay your income tax
That covers the SE taxes but, unfortunately, as a freelancer you must also pay regular income taxes— both federal and state. Fortunately, calculating those is a little less complex.
These brackets dictate how much tax you owe based on what you have earned:
This table might suggest that if you earn $40,000, your total earnings will be taxed 24%, but this is misleading. Up to $9,325 will be taxed at 10%; $9,325 to $37,950 will be taxed at 15%; the remaining $2,050 will be taxed at 24%.
Don’t worry about state tax until you complete your federal (but keep in mind the return must still be filed by April 15th). If you live in Alaska, Florida, Nevada, South Dakota, Texas, Washington or Wyoming, congrats! You don’t need to worry about state tax at all. For those in Tennessee or New Hampshire, you only need to declare income from dividends and interest income, but not earned income. Everyone else, buckle up.
Each state levies their own taxes, and on the whole, they are based on how much you earn. Some have a flat fee. Instead of going through all 41 states that levy state tax, Balance has come to the rescue with a page of state calculators. Simply find your state and click to open the calculator and forms required.
SE Tax: A Case Study
Let’s break it down by the numbers. Below is a rough example, based on an average Freelance Editor at Reedsy and calculated by Bonsai:
- Annual income: $80,000
- Social Security Tax: $9,161 (c. 12.4%)
- Medicare Tax: $2,143 (c. 2.9%)
- Total Federal Tax: $11,304 (c. 15.3%)
- State Tax (Based on a single person in New York): $4,313 (c. 6.45%)
Now, let’s break down a single collaboration on Reedsy:
- Developmental edit: $2000
- Reedsy Fee: $200 (tax deductible)
- Stripe Fee: $6 (tax deductible)
- Skype credits: $4 (tax deductible)
- ‘Office’ utilities: $20 (tax deductible)
- Net profit: $1770
- Social Security (12.4%): $202.69
- Medicare (2.9%): $47.40
- Take home pay / Taxable income: $1519.91
As you can see, you don’t simply pay tax on what you bring in. There are deductions, such as standard business expenses, that are taken from your earnings to calculate the net profit.
If you are still with us, give yourself a pat on the back. You now know the basics rules of navigating tax as a freelancer! But of course, we wouldn’t have rules without a few exceptions.
Exceptions and caveats
First, although a client doesn’t need to provide you a 1099 form if you charged them less than $600, you still pay tax on it in the same way you would if the charge was above $600. This is a common mistake that can cause headaches later.
Second, your Social Security and Medicare tax is likely to be slightly higher than what you paid when you were traditionally employed. Traditional employers split the cost, so one tiny drawback to the freedom of freelance work means you will pay a bit more here.
Finally, if you only freelance part-time, you will still need to pay self-employment taxes (if you receive more than $400 profit on freelance projects in the year). More money, more problems, right? But hey, at the end of the day — more money, more money.
The Tax Management Master Plan
Congratulations! You are now equipped to handle your own tax and avoid the typical tax day dread. If you still aren’t sure how to connect the dots, here is our full tax management master plan.
- Set up a Business and Tax bank account,
- Decide your expenses management system,
- Download Schedule CE-Z and Form 1040-ES,
- Sign up for EFTPS and pay,
- Meet with an accountant for a consultation (if you need any reassurance), then:
- Put on a smug smile and chill out.
If you have any thoughts, questions (or gripes) about paying tax as a freelancer, leave a message in the comments below.