What Is a Freelancer: Examples, Taxes, Benefits, and Drawbacks

What Is a Freelancer?

A freelancer is an individual who earns money on a per-job basis, usually for short-term work as an independent contractor. A freelancer is not an employee of a firm so they're at liberty to complete different jobs concurrently for various individuals or firms unless they're contractually committed to working exclusively until a particular project is completed. Freelancers are considered part of the gig economy.

Understanding Freelancers

Freelancers are typically considered to be independent contractors. They are contracted to perform work for another entity as a non-employee.

Instead of being employed in a permanent position by a company, freelancers work on a per project or contract basis, often for numerous different clients or companies. They are self-employed, meaning they are considered to work for themselves.

There isn't a set amount of hours you must work to be considered a freelancer. Some freelancers freelance full-time. Other people, meanwhile, may freelance as a side job to get some extra income.

As independent contractors, freelancers typically require signed contracts for the job to be done. They'll agree to a predetermined fee based on the time, skill, and effort required to complete the task. This may be a flat fee, a per-hour fee, a per-day fee, a per-project fee, or some other similar measure.

Freelancers and Taxes

The Internal Revenue Service (IRS) categorizes freelancers as self-employed workers. Unlike an employee of a company, a self-employed worker doesn't have their taxes withheld by the company with which they're doing business. Paying income taxes is therefore the sole responsibility of the freelancer.

Estimated taxes must be paid in advance in quarterly installments. A freelancer is also subject to the self-employment tax mandated by the IRS in addition to income tax.

Freelancers don't receive W-2 forms for income tax purposes. They're instead sent a 1099-NEC tax form that typically doesn't include any tax withholdings. A freelancer who provides services to multiple clients during a given tax year will receive 1099-NEC forms from each of them.

The Self-Employment Tax

The Social Security tax is assessed at a rate of 6.2% for an employer and 6.2% for the employee. An independent worker or freelancer would therefore be taxed 6.2% plus 6.2% for a total of 12.4% because they're considered to be both the employer and the employee. However, there is an income limit above which the Social Security tax cannot be applied. For 2024, that annual limit is $168,600.

Self-employment tax also includes Medicare. The Medicare tax rate is 1.45% each for employer and employee for a total of 2.9% for a self-employed worker. There is no limit on the amount of wages subject to Medicare tax, and if you earn above a certain amount ($250,000 for married filing jointly; $125,000 for married filing separately; and $200,000 for all other taxpayers) a 0.9% additional Medicare tax applies.

The self-employment tax applies to a freelancer who earns $400 or more in a tax year.

Business Expense Tax Deductions

Freelancers may be able to deduct certain business expenses from their taxable income, thereby lowering the amount of tax they must pay. To qualify, these expenses have to be ordinary and necessary expenses for the operation of the business, according to the IRS. A freelancer would not be able to claim a deduction for an expense that didn't pertain to doing business.

Some examples of deductions that can be claimed include home office expenses and the costs of traveling for a job, entertaining a client, and taking courses or getting certifications that directly relate to the business profession.

Benefits and Drawbacks of Being a Freelancer

The benefits of being a freelancer include having the freedom to work from home or other unconventional workspaces, a flexible work schedule, and a better work/life balance. Freelance work can benefit workers who have been laid off and can reduce the incidence of overall unemployment in an economy.

Drawbacks include uncertainty about future income, job stability, and consistently finding new and ongoing work. There's also the lack of employer benefits, such as insurance, retirement plans, and paid vacation. When factoring all of this in, freelancers can end up making less than employed salaried earners.

Types of Freelancers

An example of a freelancer would be an independent journalist who reports on stories of their choosing and then sells their work to the highest bidder. Another example is a web designer or an app developer who does one-time project work for a client and then moves on to another client.

Fields in which freelancers often work include:

• Graphic design and illustration
• Marketing, media, and public relations
• Financial support such as tax preparation
• Writing, editing, and proofreading
• Photography and videography
• Data entry
• Software programming and beta testing
• Website design
• Sales
• Driving for rideshare platforms or food delivery companies
• Care work

The Bottom Line

Freelancers are paid per job by their clients, typically for short, designated periods of time or to perform a single task. They're not employees and this comes with some drawbacks, such as a lack of employer-provided benefits like health insurance or a retirement plan. They must also pay an additional self-employment tax. That said, freelancing can be an ideal arrangement for someone who thrives on having the freedom to determine their own schedule and to work where they please.