Alicia, a budding web and brand designer, was excited about working for herself and choosing projects that spoke to her. She loved to get to know her clients and help them create brands that allowed their personalities to shine through. Her artistic sense, ease with technology, and insights into social media made this work a perfect fit for her. But when it came to dealing with taxes, she felt completely lost.
I'm not going to lie—taxes are complex, bureaucratic, and use jargon with random letters and numbers like W-9s and Schedule Cs and Form 1040s.
As a CPA with six years of experience, I’ve seen how incomprehensible taxes can be to creatives who just want to do the work they love to do, and the tax aspect can be the hurdle that trips them up. As a writer myself, I always wanted to help when I saw creatives struggle with financial issues, which was why I chose to focus on creatives when I started my own accounting practice.
Disclaimer: While the terms freelancer and independent contractor have different meanings in terms of how people relate to their work, they are all considered self-employed and file taxes the same way.
What do I mean by self-employed? You may call yourself a freelancer even if you are taking several jobs on payroll, but if you get a W-2 (or several of them), in the eyes of the IRS you’re considered an employee, even if you’re jumping from job to job. You file your taxes as a regular employee would—a lot simpler. But if you get paid without having any taxes withheld, or you get a 1099 for any kind of work you do—you are considered self-employed—so this guide is for you.
Tax filing is arguably one of the most daunting aspects of being self-employed. It can be especially challenging for creatives because 1) tax and finance aren’t mandatory subjects in school, 2) this left-brained, follow-the-rules thinking needed is the opposite of the right-brained, outside-the-box thinking creatives excel at, and 3) there are real monetary consequences for getting it wrong.
Unless you’ve studied business and accounting, there’s no reason why you would suddenly know all this. When you’re self-employed, you are responsible for withholding, filing, and paying the taxes that businesses do. Even though it can be intimidating, one of the worst mistakes people make is to bury their heads in the sand, since back taxes and penalties can add up, fast.
Compared to selling products, hiring employees, or having business partners, being a one-person service-based business is relatively simple. Once you know what to do, the process is largely the same from year to year and is definitely doable by yourself.
This article is a “quick and dirty” guide to what -self-employed creatives need to know about tax filing, whether you’re self-employed full-time or get 1099s for side gigs. I’ll walk you through how to get organized so you can track your expenses and maximize deductions. Then we’ll look at whether you need to register as a business and what that means. Lastly, we’ll get into the nitty gritty of the taxes you’ll need to pay and how to calculate them. This overview will equip you with a foundation to setting up a system for yourself, so you can feel confident at tax time instead of overwhelmed.
I told Alicia that when you first start out, don’t make it more complicated than it has to be. The first thing you want to do is start tracking your expenses.
One of the mistakes new freelancers make is not tracking their business deductions. If you are self-employed, the bad news is you pay your taxes out of pocket rather than have it withheld from your paycheck.
But the good news is—you also get to deduct business expenses from your income, thereby reducing the taxes you have to pay. This is why good record keeping is super important—it’s your first step to making sure you don’t pay more taxes than you need to.
Don’t go out and get Quickbooks right away though—accounting software has its own learning curve. Instead, you can track income and expenses on a simple spreadsheet – or even on paper if you prefer something more tangible. There’s no need to go crazy with formulas, either, unless you’re a spreadsheet nerd like me. Simply list the income and expenses separately and add them up.
Here’s a simple Google Sheets template you can copy and use for yourself:
Additionally, you don’t need a separate business checking account if you don’t have a lot of expenses, but it might be a good idea to have one eventually for easier tracking. As you can see from the above screenshot, you can add expenses no matter what account the money came from.
If you work with few clients on longer-term projects, this may be all you need. You can always upgrade to a software solution as your volume increases, or if you need something that allows you to invoice clients and take payments all in one place.
What kind of deductions can you take? Business deductions are any expense that is “ordinary and necessary”—meaning anything that people in your line of work typically spend. For example, a drawing tablet would be a common deduction for graphic designers, but it wouldn’t be for a hairdresser. Here are some common deductions for freelancers.
Advertising and marketing – Google or Facebook ads, sales conventions or conferences, networking costs, graphic design, social media marketing, brochures and flyers, business cards.
Computer and software – Adobe Suite, website expenses, new computer purchase, computer accessories, accounting software, project management software.
Education expenses – Training courses and books related to your work.
Health insurance – Sole proprietors get to deduct health insurance premiums if there is net income from the business, although it only reduces income tax, not self-employment tax (see below for definitions).
Retirement contributions - If you have extra money to sock away for retirement, contributing to a retirement plan will help reduce your income tax. You can use a traditional IRA and contribute up to $6000 (as of 2020 and 2021, $7000 if age 50 or older), or use a SEP IRA and contribute up to 25% of net income to a maximum of $57,000 in 2020.
Interest paid – Such as interest on a business credit card or line of credit if the money was used for business.
Meal expenses – Coffee or meals with potential or existing clients and vendors.
Office supplies – Paper, ink cartridges/toners, pens, printer/copier.
Phone and Internet – Your phone and Internet expenses are both deductible if you use them for business.
Professional fees – Legal and accounting fees, virtual assistants.
Travel expenses – Flights, hotels, taxis, car rentals are deductible if the primary purpose of the trip is business.
Mileage – You may not realize that you shouldn’t deduct gas expenses directly if you use your car for business. Instead, you have to track both business miles and total miles driven on your car to calculate percentages used for personal and business. You can either take the business percentage of all vehicle expenses (gas, insurance, licensing, and maintenance) or use the IRS standard mileage rate times the number of business miles. The standard mileage rate is 57.5 cents per mile in 2020 and 56 cents per mile in 2021. Track miles on a notebook in your car or use an app like MileIQ or Triplog to track miles automatically using the GPS in your phone.
Home office deduction – If you work from home, you can deduct a portion of your rent or mortgage interest, property taxes, utilities, repairs, and insurance as business expenses. Calculate the percentage by measuring the square footage of your space dedicated to work – this may be a desk, a room, or part of a room – and divide it by the total square footage of the apartment or house. You can either take a simplified deduction of the business square footage times $5 (current as of 2021) up to 300 square feet or the business percentage of actual expenses, whichever is greater.
Emily was a video game artist. Her character designs have appeared in small indie games, and her Instagram has started gaining traction. She recently moved to Seattle from Denver, CO, and lined up some contract work in the area. She wanted to know if there was anything she had to register before she started working as a freelancer.
Most discussions on business taxes start with your business entity, because this determines which tax forms you'll file. For those who are self-employed, this is simple—you’ll file as a sole proprietor. You don’t need to do anything to set up a sole proprietorship—the business is automatically tied to your Social Security number (SSN).
While not mandatory, it would be a good idea to get an EIN, or Employer Identification Number, also referred to as FEIN or employer ID, for security reasons. You can use the EIN in place of your SSN on a W-9 (see definition below) and other places where it’s requested (like when applying for a business license). You don’t have to be an employer to get one! You can get an EIN for free on the IRS website.
In Washington, if you make over $12,000 a year as a freelancer, you’ll need to get a business license. You would also need a business license if you want to use a business name that is different from your name (also called trade name or DBA – “doing business as”), or if you sell products that require you to collect sales tax. For other license requirements, visit the Washington Department of Revenue.
You don’t need to register a trade name as long as your full legal name is in the business name, for example, “Jane Eyre Design,” but you do if the name implies there are more people working with you, such as “Jane Eyre Company” or “Jane Eyre and Associates.”
If you’re wondering whether you need a business license and don’t meet any of the above requirements, just know that once you register, you’ll need to start making business tax filings at least once a year even if you don’t owe anything. Don’t give yourself additional paperwork if you don’t need to.
If you need a Washington business license, you may also need a license to do business in your city. Look for your city on this list to see if you need to get a city business license.
You may be considering forming an LLC, and wondering how that affects your taxes. Going that road is a whole other story with its own legal implications, but for the purposes of this guide, just know that if you are a single member LLC, you must choose to file taxes as a sole proprietor or a more complex entity, such as an S Corp. Most people choose sole proprietor for easier filing, in which case this guide would still apply.
Get ready to know the terms W-9 and 1099 really well. Like it or not, these numbers and letters will sear into your brain come tax time!
W-9 – This is a form you fill out to provide your clients with your legal business name (your name for sole proprietorships), trade name, EIN or SSN, and address so they can send you a 1099. It is not filed with the IRS. Feel free to fill it out once and give a copy to each client -- just be sure to update the address if you move. The form can be downloaded here.
Form 1099-NEC - Businesses are required to send 1099-NEC (previously called 1099-MISC; NEC stands for “non-employee compensation”) forms if they paid at least $600 to sole proprietors who provided services. It is filed with the IRS so that it knows to expect at least that amount of self-employment income on your tax return. If you get one, make sure the amount is correct and include it on the Schedule C (defined below).
You won’t receive a 1099-NEC if you were paid with a debit card, credit card, or third-party processor like Paypal (in which case, the payment processor is responsible for sending you a 1099-K if the total amount of transactions exceeds $20,000 or the total number of transactions exceeds 200). You also won’t get one if you did work for individuals (as a photographer might) instead of businesses.
Get ready to party, tax style! Here’s where it all comes together. At tax time, if you’ve done the above and have your income and expenses in order, filing will be a piece of cake. You might even enjoy it! First, let’s discuss what taxes you’ll need to be aware of:
This is the income tax calculated on your individual tax return, or Form 1040, that you’ve always filed. But instead of simply inputting your W-2 information, you will now list your 1099 income and tracked expenses on a Schedule C. (This is why it’s so important to make sure you track your expenses.)
If you worked as an employee and freelance at the same time, you’ll have the fun of doing both!
Here’s what the Schedule C looks like. A tax filing software like TurboTax or TaxAct can walk you through filling it out for a cost.
If you worked as an employee or currently do, you might have seen Social Security and Medicare contributions withheld from your paychecks. But you probably didn’t know—you were only paying half of it!
Your employer paid the other half, which don’t show up on pay stubs. At 15.3% of your net income (12.4% for Social Security and 2.9% for Medicare), self employment tax is likely the bulk of the taxes you’ll pay.
However, one silver lining is that you get to deduct half of your self-employment tax as a business deduction, just like an employer can deduct the half that they pay.
Check out this IRS article on self-employment tax for more details.
By law, we have to pay taxes as we earn income throughout the year. Self-employed workers make these payments on their own instead of getting them withheld from a paycheck.
Estimated taxes are not an extra tax, but the quarterly estimates of your total taxes, which includes income tax and self-employment tax. The due dates are April 15, June 15, September 15, and January 15 and can be made by mailing in a Form 1040-ES with a check or online.
If you both freelance and work for an employer, you can also pay estimated taxes by increasing your withholding at your job to cover estimated taxes—it all goes into your account with the IRS.
The most important thing I have to say about estimated taxes is make sure you set aside money for it each month, such as in a separate savings account. People often make the mistake of thinking they had extra money to spend and end up getting caught with a large tax bill.
To calculate your estimated taxes, you’ll have to update your income and expenses at least quarterly. You’ll also need to know the deductions you’re likely to take on your personal tax return, which can get complex if you’re married or own a home. You’ll also need to consider your tax bracket for income taxes.
For single filers, estimated taxes can be roughly 25% of your net income (15.3% of self-employment tax plus about 10% for income taxes). To calculate your quarterly payment, subtract your total expenses from your total income, and multiply by 0.25. You can also do this on a monthly basis so you know how much to set aside for taxes. This is a broad estimate that doesn’t take into account individual situations, but it should work for most at or below the 22% tax bracket. You want to err on the side of paying a little too much and getting a refund rather than not enough and getting hit with a big tax bill.
For a more accurate estimate, IRS’s Form 1040-ES contains worksheets that walk you through the calculations. You can also try online estimated tax calculators like this one.
A simpler way of paying estimated taxes uses what’s called the “safe harbor” rule. Even if you don’t get the calculation exactly right, the IRS won’t charge a penalty if you:
The safe harbor rule works best if your income doesn’t fluctuate too much from year to year.
Washington is one of the few states without a state income tax, but we do have something called business and occupation (B&O) tax to be paid by all businesses. The filing frequency is annually, quarterly, or monthly based on the amount of tax liability. Service businesses typically file quarterly or annually if they don’t collect sales tax.
The B&O tax is much easier to calculate than federal taxes. For service businesses, the tax rate is 1.5% of your gross income. There’s a small business credit at lower income levels so you actually don’t pay B&O tax until you’ve earned above a certain income. If the service is considered retail sales, it is taxed at a different rate (see Sales Tax below).
The B&O tax is filed on the Combined Excise Tax Return, which includes sales tax and other taxes levied by the state. It can be filed on paper (the form is mailed to you before the due date) or online.
Cities in Washington that require a business license usually also require their own B&O tax return to be filed. Find out if your city has a B&O tax here.
Washington business & occupation tax rates
- Annual filers - April 15th
- Quarterly filers - Last day of the month after quarter-end.
- Monthly filers – 25th of the following month.
Some services are subject to sales tax in Washington and are categorized as retail sales rather than services. Most of these won’t apply to creative fields, but here’s the full list. However, if you sell products or artwork to consumers (not resellers), you’ll need to charge sales tax and forward it to the state. As digital products have become a popular way to sell your work, you may not be aware that some states, including Washington, require sales tax to be charged on them, just like physical products do.
Digital products include:
Click here for a full list of examples and definitions.
Sales tax issues can get complex very fast, especially if you sell online. Tax rates differ by municipality and need to be tracked based on delivery location or sales location. In Washington, sales tax is forwarded to the state through the Combined Excise Tax Return, the same one you file your B&O tax on. Sales to other states usually aren’t taxable until you reach a certain level of sales in that state (commonly $100,000).
Look up sales tax for cities and municipalities in Washington here: Washington sales tax lookup tool.
2020 was a weird year. Your tax situation may have been impacted by COVID-19—stimulus checks, unemployment, PPP and SBA loans, and other special one-time situations. Here are some resources to find out more about the latest COVID relief bill and how it impacts your taxes, help you figure out your COVID deductions and credits, and how PPP forgiveness will affect your taxes.
Taxes may be more complicated when you start working for yourself, but it’s a skill that you can learn. In this guide, I’ve given you a comprehensive overview to get you started. You’ve learned that you need to track your expenses and make sure you take all the deductions you can, obtain business licenses if required, and calculate the amount of taxes you need to set aside. It can be a lot at first, but soon enough it will just be another admin task you do.
Despite the stereotype of creative work as “coming out of inspiration,” as a working creative you probably know that there’s a lot of planning and systems that go into any successful project. So consider the skill of self-employed tax filing as another tool that will financially empower you to keep creating and choosing the projects you prefer.
Now go forth and file!