If you're a freelancer and the word "taxes" makes you want to close this email, this article is specifically for you.
I avoided this topic for years. Not because I didn't care, but because no one ever explained it in a way that made sense to me. I'm a designer, not an accountant. This article is what I wish someone had handed me when I started freelancing.
Taxes 101: Why You Pay and What You Owe
Taxes fund public infrastructure; roads, schools, emergency services, federal programs. When you work a W-2 job, your employer withholds taxes from every paycheck and sends them to the IRS on your behalf. You barely think about it. As a freelancer, nobody withholds anything. The full responsibility falls on you.
There are three main taxes you need to know about:
Income tax is the federal (and often state) tax on what you earn. The rate depends on how much you make; the more you earn, the higher the percentage on your top dollars.
Self-employment tax is the one that surprises most freelancers. It covers Social Security and Medicare. W-2 employees split this cost with their employer; each side pays 7.65%. As a freelancer, you pay both sides: 15.3% on your net earnings.
State tax varies depending on where you live. Some states (like California and New York) add significant percentages. Others (like Texas and Florida) have no state income tax at all.
Here's how obligations differ depending on your situation:
W-2 Employee | Freelancer (Sole Prop) | S-Corp Owner | |
|---|---|---|---|
Income tax | Withheld by employer | You pay directly | You pay directly |
Self-employment tax (15.3%) | Split with employer (you pay 7.65%) | You pay full 15.3% on all net profit | 15.3% on salary only; distributions exempt |
Quarterly estimated payments | Not required (withheld automatically) | Required if you expect to owe $1,000+ | Required on salary and projected income |
Tax filing | Single return (1040) | Single return (1040 + Schedule C) | Two returns (1040 + 1120-S) |
Payroll | Handled by employer | None | Required (you run your own payroll) |
This is why I recommended setting aside 25-30% of every check in the last article. Self-employment tax alone takes 15.3%, and income tax stacks on top.
Pay Quarterly, Not Annually
The IRS expects you to pay taxes as you earn throughout the year; not in one lump sum in April. If you expect to owe more than $1,000, you're required to make quarterly estimated payments. The 2026 deadlines are April 15, June 15, September 15, and January 15.
I made the mistake of skipping quarterly payments early on. I wasn't short because I set money aside, but the full bill hitting at once is a different kind of stress than spreading it across four payments. And if you don't pay quarterly, the IRS can charge an underpayment penalty on top of what you owe.
The fix: estimate your annual tax obligation, divide by four, and pay each quarter through IRS Direct Pay or EFTPS. Your CPA can help calculate the right amount.
Deductions: What You Can Write Off
Before you think about tax structure, make sure you're not overpaying on the basics. Every legitimate business expense you deduct reduces your taxable income. Most early-career freelancers leave money on the table here because nobody tells them what counts.
If you're a creative professional, these are the common ones:
Software and subscriptions: Adobe Creative Cloud, Figma, Cinema 4D, DaVinci Resolve, Dropbox, Slack, any tool you use for client work.
Hardware and equipment: your computer, monitor, drawing tablet, external drives, camera gear.
Home office: if you work from a dedicated space at home, a portion of your rent or mortgage, utilities, and internet is deductible.
Professional development: courses, workshops, conferences, books related to your craft.
Marketing: your website, portfolio hosting, domain registration, paid ads.
Business meals: meals with clients or collaborators are 50% deductible.
Phone and internet: the percentage you use for business.
Travel: flights, hotels, and transportation for client work or industry events.
Track these throughout the year, not in a panic every March. A tool like QuickBooks or even a simple spreadsheet will work. Every dollar you document is a dollar that reduces what you owe.
The S-Corp Question
Early on in Eido’s formation, my CPA noticed I was generating enough revenue for it to make sense to elect S-Corp status. I had no idea what the benefits were at the time. But the tax savings were real.
Here's how it works in plain terms:
As a sole proprietor, you pay 15.3% self-employment tax on all your net profit. Every dollar. As an S-Corp, you split your income into two buckets. You pay yourself a "reasonable salary" through payroll and pay the full 15.3% on that salary. But profit above that salary gets taken as a distribution, and distributions are not subject to self-employment tax.
Here's a simplified example at $120,000 in net profit:
Sole Proprietor | S-Corp (with $60,000 salary) | |
|---|---|---|
Net profit | $120,000 | $120,000 |
Subject to 15.3% SE tax | $120,000 | $60,000 (salary only) |
SE tax owed | ~$18,360 | ~$9,180 |
Annual savings | — | ~$9,180 |
Same income. Different structure. Roughly $9,000 back in your pocket. Worth it?
The general threshold where S-Corp savings start outweighing the added costs is around $60,000-$80,000 in annual net profit. Below that, the cost of running payroll, filing an additional business return (Form 1120-S), and keeping cleaner books; typically $1,500-$4,000 per year; can eat into or exceed the savings.
The setup is straightforward: file IRS Form 2553 to elect S-Corp status, set up payroll to pay yourself a reasonable wage, take remaining profits as distributions, and file your business and personal taxes accordingly. A good CPA can walk you through the entire process.
Find a CPA Who Speaks Your Language
This might be the most practical advice in this entire article.
I've tried a few CPAs. Some knew their stuff but couldn't explain it to me in a way I understood. That's a dealbreaker. Unless your CPA has the communication proficiency to explain tax concepts clearly to someone who isn't a tax professional, they're not the right fit. You need someone in your corner who you trust; someone who proactively looks out for your financial structure, not just files your returns.
My CPA was the one who identified that S-Corp election made sense for me. I wouldn't have known to ask. That single recommendation saves me thousands every year.
A Simple Tax Workflow
Whatever your setup looks like, here's what matters: keep your books clean throughout the year, not in a scramble every April. Use a tool like QuickBooks or Wave to track income and expenses in real time. Pay your quarterly estimates on schedule. Work with a bookkeeper if the day-to-day tracking isn't something you'll maintain yourself. And have a CPA handle your annual filings.
The creatives who get burned by taxes aren't the ones who made bad money. They're the ones who ignored the structure around it.
What This Series Was About
This is the last article in the Money series. We started with how you think about money. Then how you define your value. Then living generously. Then saving and investing. And now, the structure that protects what you've built.
None of these topics are the reason you got into creative work. But all of them are the reason some people sustain a career and others don't. The technical skills get you in the room. The financial maturity lets you stay.
Until next week ✌🏽 – Joash.