New to Freelancing? What to Know About Taxes This Year
If you received independent contractor income in 2022, documenting your expenses will help you lower your tax bill this spring.
If you did freelance work last year, a little extra effort this tax season could save you money and lead to a bigger refund.
Many Americans make ends meet with independent contract income. There were 64.6 million independent workers in 2022, up 26% year over year, according to a report from MBO Partners, a talent provider that works with Fortune 100 companies. The report also found that the number of "occasional independents," people who earn money from contractor work at least once a month, has more than doubled in a two-year period, increasing from 15.8 million in 2020 to 31.9 million in 2022.
"I don't recommend any business owner try to DIY their taxes," said Jannese Torres, an award-winning money expert and the founder of Yo Quiero Dinero, a personal finance education platform. Not every independent contractor has a registered business, but some do, making tax diligence more important.
Independent contractor income leads to both additional filing steps and opportunities to lower your overall tax bill. Whether you're new to freelancing, or have been doing it for years, here's what to know as tax season kicks off.
Gather necessary documents
Make a list of all the sources of income you had last year. For each of these, you'll receive either a 1099 or a W-2. In some cases, you might only receive these documents via email. Remember to print and save this information for later when it comes time to file.
"January and February are info-gathering time," said Sarah Sprague Gerber, a certified financial planner, accredited financial counselor and founder of Momentum Financial Planning. Companies are required to distribute 1099 and W-2 forms no later than Jan. 31 of each year, so you should have everything you need by the first week of February.
Maximize your deductions
If some of your income was used for certain expenses, such as a large medical bill, the IRS doesn't want to tax you on that money. These are called deductions, and taking the time to document them can lower your overall tax liability. Additionally, certain deductions are more valuable than others.
Some deductions are "above the line," meaning they are factored into calculating your adjusted gross income for the year. Above-the-line deductions will lower your AGI, and may make or break your eligibility for certain other tax credits and deductions later on in your return that have a maximum income cutoff. The remaining "below the line" deductions are then itemized later on in your return to arrive at your taxable income, the number that will determine your tax bracket classification and what percentage you owe in taxes.
Mortgage interest is a classic above-the-line deduction, according to Gerber. "A mistake I made when first filing my taxes was not realizing that student loan interest [payments] are above the line," she said.
Taxpayers must decide to either itemize remaining deductions or take a standard deduction instead. Most Americans don't have substantial deductions, so the standard deduction makes things simpler because it lets you forgo itemizing deductions and accept a flat adjustment to your income instead. The standard deduction for single taxpayers for the 2022 tax year is $12,950 (it increases to $13,850 for the 2023 tax year). Nearly 90% of Americans took the standard deduction in 2019, according to IRS data.
When it comes to freelance income, however, you can take the standard deduction and still also deduct some of the expenses you incurred to complete your independent contractor work. For example, if you drove for a rideshare service like Uber or Lyft in 2022, some of your mileage or vehicle maintenance could be considered a contractor expense that is necessary to do the job.
If you received independent contractor income in 2022, and don't have a formal business entity, such as an LLC, the IRS will classify you as a sole proprietor, which conveniently lets you list these adjustments within your personal tax return by including a Schedule C form.
Independent contractor expenses can also include things like continuing education courses, your coworking space or conference attendance.
Decide if you'll do taxes yourself or get outside help
The "right" kind of tax preparer isn't necessarily one-size-fits-all. It really depends on your financial situation and what's happening in your financial life, according to Gerber.
If you're filing your taxes yourself for the first time, Gerber recommends taking a look at your 1040 form and trying to do it yourself on the IRS website as a learning experience, even if you end up using a filing software or credentialed tax preparer later.
"It can be really illustrative to say, 'Oh, this is what's happening. This is how I'm paying my taxes and my share to the government,'" she said.
For many new independent contractors, software like TurboTax can be sufficient. If contractor payments are a substantial portion of your income, or if your hustle is evolving into a full-blown business, it might be time to bring in a professional. Torres adds that, while it's more costly to outsource your taxes, "tax prep costs are also a deduction for business owners."
Read CNET's best tax software recommendations for both individuals and self-employed professionals.
Don't be intimidated
The final piece of advice from personal finance experts is: Don't psych yourself out.
"In most cases, your taxes are more manageable than you might think, and there are plenty of experts available to help walk you through the process," said Torres, adding that the biggest tax mistake she sees people make is getting stressed out and not filing their taxes at all, or doing the bare minimum to make the paperwork go away.
The tax filing deadline of April 18 gives you some wiggle room. Use this time to educate yourself about a money management task you'll be doing every year.
"Really learn about it," said Gerber. "Try it yourself. You can do it."
CNET contributor Nick Wolny edited and provided additional reporting to this story.