A friend that started working as a Freelancer in 2015, recently asked me for a general rundown regarding how a Freelance / Contractor life will change his U.S. tax situation. I figured this info could be helpful to others, so here is the response I sent. Keep in mind, I'm not an accountant or a lawyer, so I would advise you to fact check anything below on your own, but hopefully it'll give you some cursory knowledge to draw from.
The main thing that changes between being an employee and being a contractor (from a tax POV) is that taxes are not taken out of your pay on a regular basis. What this means is that when you file your taxes in April, you’ll end up owing more money, because instead of paying these taxes all year long (as an employee, your employer would withhold state and federal taxes from your paycheck and pay them on your behalf) you pay them all at once* (at tax time).
The other thing that’s slightly different is that instead of receiving a W-2, as you would from an employer, you’ll receive a 1099's at the end of the year. A 1099 is basically the contractor equivalent of a W-2, which reports how much you made for the year and how much tax was withheld (for a contractor, usually $0 is withheld, which is why you’ll owe so much money in taxes). Anybody that pays you over $600/yr as a contractor is supposed to send you a copy of the 1099 that they submit to the IRS, reporting how much money they paid you. This is so the government is aware of how much you’re making; they place the burden on the businesses paying you to report these amounts so they can keep tabs without relying solely on you.
In addition to collecting your 1099’s, you’ll also have the opportunity to report any other earnings for which you did not receive a 1099. Some companies may be late in getting you a copy of the 1099 or may not file them. If you don’t report the income from these jobs, the blame falls on you. The IRS will not be happy if they receive a 1099 from somebody reporting that they paid you money and you did not include this income in your taxes.
In general, your tax burden will be the same as somebody that was working as an employee, the difference is that you’ll have to pay your taxes as a lump sum instead of having part or all of your taxes withheld from your paycheck every pay period. So start saving accordingly, knowing that you’ll need to pay about 30-50% of your income back in taxes.
It is important to start tracking expenses and receipts that are related to your freelance life, because you can claim these as expense deductions on your tax return and they lower your pre-tax income. Essentially you become a ‘sole proprietor’ if you’re working as a freelancer/contractor. Income and expenses from a freelance/contractor business are filed on the IRS form 1040 'Schedule C.’
If you haven’t before, I would suggest doing your taxes using tax software, or having them done professionally, as it is nearly impossible to do it by hand as a contractor/freelancer.
*Note from above where I said once: If you meet a certain threshold for this type of income, you’ll actually be required to pay taxes 4 times a year. This is to make sure that you’re spreading out your tax liability for the year, and to make sure the govt gets it’s money. If you need to make quarterly payments, it will start the year after you hit the threshold. For instance, if you make enough this year, you’ll have to start paying quarterly taxes in 2016 (the first one of which will be due the same time as your 2015 annual taxes - in April 2016). The quarterly form you may need to file is 1040-ES (stands for estimated taxes).
Here are some websites that I find useful for this type of stuff:
NOLO: (they publish books, but frequently if you google a tax related question you’ll end up on their website, as they have a lot of good free info):