Contributed by: Joshua C, FreeTaxUSA Agent, Tax Pro
There are many advantages to working as a freelancer, contractor, or other self-employed person, but taxes often don't feel like one of them. Unlike traditional employees, you don't have an employer withholding taxes for you or providing a W-2 to easily report your income for the year. Instead, you’re responsible for keeping track of all business income and certain business-related expenses.
This article reviews the key differences in filing taxes when you’re self-employed rather than an employee of a company. By the end, you'll have a better understanding of the steps required and more confidence in preparing your tax return.
What is Schedule C?
The main focus of any individual income tax return is Form 1040, but if you’re self-employed, you’ll usually include Schedule C with your tax return. Schedule C reports your business income and expenses.
The final net profit amount from Schedule C will also appear on your main tax forms because it’s included in your total taxable income. It’s reported on Schedule 1, which then flows through to your Form 1040.
💡 Note:If your business activity lost money during the year, meaning your expenses were greater than your revenue, it’s reported as negative income and may reduce your total income and tax for the year. However, there may be limitations if the loss is very large, unusual, consistently repeating, or if the IRS determines the activity isn’t a legitimate business. The IRS follows certain rules to make this determination.
Who needs to file Schedule C?
This common tax form is used by:
- Any individual who operates a business as a sole proprietor,
- Independent contractors or consultants,
- Freelancers and gig workers such as writers, photographers, tutors, software developers, independent entertainers, etc.
- Workers for a company that don’t regard them as employees (including most ride-share and delivery driving services), or
- Any other self-employed individual.
There may be cases where you aren't sure if an income-producing activity should be considered self-employment, or if it's just a hobby that sometimes generates income. This article will help explain the distinction.
As a general rule, if you received Form 1099-NEC or 1099-MISC, there's a high probability it should be reported as self-employment income. There are exceptions, however, and if you’re unsure about the nature of the work or your relationship with the payer, here's another article that explores that question specifically.
Gather your income information
Before preparing your tax return, you’ll need to collect records of income or revenue your business earned during the year.
Your revenue includes all amounts reported on Forms 1099-NEC for independent contractor work, Form 1099-K from certain payment processors, or Form 1099-MISC for other payments related to your business. You may also have income that isn’t reported directly to you on one of these forms, which still needs to be included. Be sure to include payments you received in cash, check, direct deposits, Venmo, PayPal, Cash App, or any other platforms that may not result in a tax form. All amounts received for your business need to be reported on Schedule C, whether or not you receive a form from the payer.
If you’re worried your records aren’t complete enough to count all your revenue, bank statements and invoices can be useful in reconstructing the year's transactions. Using bookkeeping software for your business can be a convenient source for tracking your payments received and expenses paid.
Gather your business expenses
The amounts you spend operating your business can be subtracted from your net business income, which may lower your tax bill. For this reason, documenting your business expenses is an important task so you can accurately report them on your tax return.
Collect all receipts, bank statements, credit card statements, or other documentation showing business-related purchases you made. Deductible expenses commonly include advertising costs, office supplies, software subscriptions, website hosting fees, professional licenses, business insurance, and legal fees. You may also be able to deduct home office expenses or travel costs if they’re directly related to your business.
Vehicle expenses are also a common deduction, especially for rideshare or delivery drivers. If you use a vehicle for your business, it’s important to keep careful records of the miles driven for the business and the miles driven for personal purposes during the year. These records are used to determine how much of a deduction your vehicle use can generate.
Generally, you want to use as many deductions as you can, but make sure the deductions are legitimate. As a freelancer, it’s easy to mix personal and business finances, making it difficult to distinguish business transactions. Keeping separate accounts and maintaining organized records will simplify tax preparation and help you avoid costly errors.
Prepare for self-employment tax
A common unwelcome surprise for new Schedule C tax filers is the discovery that they may owe more than just income tax. Self-employed individuals are also responsible for self-employment tax, which covers Social Security and Medicare taxes that are typically withheld automatically in an employer-employee relationship documented on a W-2.
The base rate for self-employment tax is 15.3% of net earnings (revenue minus expenses). This rate covers both the employer and employee portions of standard Social Security (12.4%) and Medicare (2.9%) taxes. However, Social Security tax applies only to income up to a certain threshold (which changes annually), and high earners may owe an additional Medicare tax.
If applicable to you, self-employment tax is calculated on Schedule SE, which will accompany your Schedule C and other tax forms.
Pay estimated taxes
Because you don’t have taxes automatically withheld from your self-employment income as you typically would with employee wages, you’re responsible for making estimated tax payments on your own.
The IRS expects tax payments to be made as income is earned, rather than waiting until tax filing season. If you don't make any tax payments throughout the year, you might find yourself stuck with an additional penalty.
Estimated tax payments are typically made quarterly. Due dates for each quarter's payments are:
- April 15 for income earned from January through March,
- June 15 for income earned from April through May,
- September 15 for income earned from June through August, and
- January 15 of the following year for income earned from September through December.
Payments can be made by mail or electronically. For more information on calculating and paying estimated taxes, see this article.
Prepare your return
Once you’ve gathered all your information, visit FreeTaxUSA and begin your federal tax return. Here’s how to enter your business income and expenses:
- Follow menu path: Income > Business/Rental Income > Business Income (Schedule C).
- Click Add a Business to create a new record.
Keep in mind if you have two or more unrelated business activities, you’ll need to create a separate business record (and a separate Schedule C) for each one, which can become complicated. But if you have two or more business activities that are part of the same, integrated business or are part of the same line of work (such as a freelance graphic designer who sells custom-designed branded merchandise as well), you can often report them on the same Schedule C.
As you walk through these screens, you’ll be prompted for basic information about your business. Next, income information can be entered, whether it was reported on a 1099 form or not. You’ll also see various screens to enter different kinds of expenses.
Click each category that applies to your business. The software will guide you through the screens and prompt you for relevant information. If you have questions, feel free to contact FreeTaxUSA Support.
Filing your own taxes as an independent contractor or other self-employed individual can seem intimidating, but staying organized throughout the year will make the process much simpler. Keeping good records of your income, expenses, and estimated tax payments is key to filing an accurate tax return with confidence.
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