Self-Employed Vs Freelance Taxes: All You Need to Know

Taxes can be confusing when you're not an employee — especially when trying to understand the difference between freelancer vs self-employed taxes. In this article, you’ll learn the differences between self-employed and freelance workers and see how taxes and benefits work for both of these employment statuses.

Self-employed vs freelancer: what’s the difference?

A freelancer is a person who is not a common-law employee and works on a project basis delivering products or services to their clients. For example, Olga is a freelance wedding photographer who shoots a couple weddings a month tops as a side hustle and gets paid via invoices.

A self-employed worker is also not a common-law employee — but they run their own business or get hired as a contractor by a certain company.
In practice, the term “freelancer” describes how you work, while “self-employed” is your official tax status.

‍

Self-employed as a legal status
‍

A self-employed person is someone who runs their business for themselves and is responsible for its success or failure. That means, they’re not protected by some of the labor laws— for example, they can’t get a paid sick, a maternity leave, or a severance package once they stop working with someone. 

The definition implies that all freelancers are self-employed legally — although not all self-employed people are necessarily freelancers.

‍
‍

How Do Taxes Work for Self-Employed vs Freelance Individuals?

‍
There is no tax difference between freelancers and self-employed.

When you work as a freelancer or self-employed professional, handling your own taxes is mandatory. The IRS provides a useful starting checklist, though don't overlook the specific rules that apply at the state and local level where you operate.

Rather than paying once a year, most independent workers make estimated payments every quarter based on their expected income. Form 1040-ES from the IRS walks you through calculating these quarterly amounts.

Once your business is officially registered, your tax picture expands across three layers — federal, state, and local. You'll be dealing with income tax, self-employment tax (which covers your contributions to Social Security and Medicare), and payroll taxes if anyone works for you.

To get ahead of your annual bill, try one of the many free income tax calculators online. Your final number will reflect several personal factors — things like age, marital status, and filing category — all of which show up on the tax return you submit.

‍

Self-employed taxes in the United States

To report income earned through the service in the US, you need to:

• be a US tax resident or citizen;
• have a taxpayer identification number;
• determine your tax obligations.

Two types of self-employed individuals can be distinguished:

• independent contractor;
• solopreneur.

The tax obligations of these statuses are identical; the difference lies in their nature:

Independent contractors perform specific tasks for companies for an agreed fee. The term “independent contractor” describes the relationship between a client and a self-employed individual who provides services as an autonomous business rather than as an employee. Most often, independent contractors report income based on information from Form 1099 (1099-K, 1099-NEC, 1099-MISC), which companies file with the IRS.

Solopreneurs may perform contract work as well as earn income from other sources, such as selling their own products to customers. A sole proprietorship is a business owned and operated by one individual of any type. If you receive income from services or products you sell and incur expenses related to that income, you are considered a sole proprietor.

Tax rate. The self-employment tax rate is 15.3%, both for social security and Medicare — 12.4 and 2.9% accordingly. The taxable part of your income is 92.35% of your net earnings as a self-employed person. You don’t have to claim self-employed income if it doesn’t exceed $400.

Additional rates. If you as a single person earned more than $200,000 (including self-employed income), you’ll have to pay an additional 0.9% of Medicare tax.

How to pay. File the Form 1040-ES once in a quarter. The IRS website offers several payment methods. You can pay via debit card, bank transfer, or other methods. If you’re working not just for a person but for a business, you might have to deal with other forms. We delved into the issue in our definitive expert knowledge-powered guide about W-9 vs 1099 forms — check out our blog!

For more information, check  IRS website.

Are self-employed people entitled to tax deductions?

A tax deduction is a benefit mostly associated with common-law employees — however, it depends on the country. In some countries, self-employed people can’t use tax deductions in any circumstances, others impose limits. Let’s use the same two examples and explore the possibilities.

The United States. Surprisingly, there’s plenty of tax deductions available to self-employed Americans. One of the most common is reducing your income tax (yep, it’s not the same as the self-employment tax) — you can deduct the “employer portion” from your income and pay the smaller income tax because it’s calculated from a smaller number. Other options include work-related health insurance tax deduction, travel expenses (excluding “lavish and extravagant meals”), professional education, advertising, and so on.
‍

Freelancer vs Self-Employed Taxes — Key Differences

‍

• There is no difference in tax rates
• Both must pay self-employment tax
• Both file taxes independently
• Both can claim business deductions

‍

‍