Tax Glossary for Freelancers
Tax terminology can feel like a foreign language. This glossary breaks down the most important terms for freelancers and self-employed workers in plain English — no accounting degree required.
1099-MISC
A tax form used to report miscellaneous income such as rent, prizes, awards, and other payments not covered by 1099-NEC. Before 2020, it was also used for nonemployee compensation, but that now goes on 1099-NEC. You may still receive 1099-MISC for certain types of freelance-adjacent income.
1099-NEC
A tax form used to report nonemployee compensation. If a client pays you $600 or more during the year, they must send you a 1099-NEC. You're required to report all self-employment income on your tax return even if you don't receive a 1099.
Try the related calculator →Adjusted Gross Income (AGI)
Your total gross income minus specific above-the-line deductions such as the deductible half of self-employment tax, retirement contributions, and health insurance premiums. AGI is a key figure used to determine eligibility for many tax deductions and credits.
Business Expense
A cost that is ordinary and necessary for running your freelance business. Business expenses are deducted on Schedule C and reduce both your income tax and self-employment tax. They must be directly related to your business activities and properly documented.
Try the related calculator →Depreciation
The process of deducting the cost of a business asset over its useful life rather than all at once. For example, a $2,000 computer might be depreciated over 5 years. However, Section 179 and bonus depreciation often let freelancers deduct the full cost in the year of purchase.
Try the related calculator →Effective Tax Rate
The average rate at which your total income is taxed, calculated by dividing your total tax by your total income. Because of progressive brackets, your effective rate is always lower than your marginal rate. It gives you a clearer picture of your actual tax burden.
Try the related calculator →Estimated Tax Payments
Quarterly tax payments that freelancers and self-employed individuals make to the IRS throughout the year. Since no employer withholds taxes from your pay, you're expected to pay income tax and self-employment tax in four installments: April 15, June 15, September 15, and January 15.
Try the related calculator →Gross Income
Your total revenue or earnings before any deductions or expenses are subtracted. For freelancers, gross income is the total amount clients paid you before accounting for business costs, taxes, or other deductions.
Try the related calculator →Home Office Deduction
A tax deduction for the portion of your home used regularly and exclusively for business. You can calculate it using the simplified method ($5 per square foot, up to 300 sq ft) or the regular method (percentage of actual home expenses). Available to freelancers who work from a dedicated home workspace.
Try the related calculator →Itemized Deductions
Individual deductions you can claim instead of the standard deduction if they total more. Common itemized deductions include state and local taxes (SALT, capped at $10,000), mortgage interest, charitable donations, and medical expenses exceeding 7.5% of AGI.
LLC (Limited Liability Company)
A business structure that provides personal liability protection while maintaining tax simplicity. A single-member LLC is taxed the same as a sole proprietorship by default (Schedule C) but protects your personal assets from business lawsuits and debts. Formation is done at the state level.
Marginal Tax Rate
The tax rate applied to your last (highest) dollar of taxable income. This is the bracket you're currently in and the rate you'd pay on any additional income. For freelancers, your marginal rate also includes the 15.3% self-employment tax, making it significantly higher than the federal bracket alone.
Try the related calculator →Mileage Deduction
A tax deduction for business miles driven using the IRS standard mileage rate ($0.70 per mile in 2025). Covers gas, insurance, depreciation, and maintenance. You can alternatively deduct actual vehicle expenses. Business mileage includes client visits and errands but not regular commuting.
Try the related calculator →Modified Adjusted Gross Income (MAGI)
Your AGI with certain deductions added back in. MAGI is used to determine eligibility for Roth IRA contributions, education credits, and premium tax credits for health insurance. The specific add-backs depend on which tax provision is being evaluated.
Net Income
Your total business revenue minus all business expenses, also known as net profit. This is the bottom line on Schedule C and the amount subject to self-employment tax and income tax. It's the most important number for understanding your freelance business health.
Try the related calculator →Quarterly Payment
One of four installment payments of estimated taxes made throughout the year. Freelancers divide their expected annual tax liability by four and pay on the IRS due dates. Underpaying can result in penalties, even if you pay the full amount when you file your return.
Try the related calculator →S-Corp (S Corporation)
A tax election that allows business owners to split income into salary (subject to payroll taxes) and distributions (not subject to SE tax). This can save significant self-employment tax for higher-earning freelancers, typically those making over $80,000-$100,000 in net profit. Requires running payroll and filing a separate business tax return.
Try the related calculator →Safe Harbor
A method to avoid IRS underpayment penalties on estimated taxes. If you pay at least 100% of your prior year's total tax liability through quarterly payments (110% if your AGI exceeded $150,000), you won't face penalties regardless of how much you actually owe for the current year.
Try the related calculator →Schedule C
The IRS form (Form 1040, Schedule C) used to report profit or loss from a sole proprietorship or single-member LLC. You list your business income, subtract your business expenses, and the resulting net profit flows to your Form 1040 and is subject to both income tax and self-employment tax.
Try the related calculator →Schedule SE
The IRS form used to calculate self-employment tax. It takes your net self-employment earnings from Schedule C, applies the 92.35% multiplier, and computes your Social Security and Medicare tax. The deductible half of SE tax is also calculated here.
Try the related calculator →Self-Employment Tax (SE Tax)
A tax that self-employed individuals pay to cover Social Security and Medicare contributions. The rate is 15.3% of 92.35% of your net self-employment earnings — 12.4% for Social Security (up to the wage base limit) and 2.9% for Medicare. You can deduct half of this tax from your gross income.
Try the related calculator →Sole Proprietorship
The simplest business structure for freelancers. You and the business are legally the same entity. Income is reported on Schedule C of your personal return. There's no separate business tax return, but you're personally liable for all business debts. Most freelancers start as sole proprietors.
Try the related calculator →Standard Deduction
A flat dollar amount that reduces your taxable income, available to all taxpayers. For 2025, it's $15,000 for single filers and $30,000 for married filing jointly. You choose between the standard deduction and itemizing — whichever gives you a larger deduction. This is separate from your Schedule C business deductions.
Tax Bracket
A range of income taxed at a specific rate in the federal progressive tax system. The US has seven brackets (10%, 12%, 22%, 24%, 32%, 35%, 37%). Only the income within each bracket is taxed at that rate — not all of your income.
Tax Credit
A dollar-for-dollar reduction of the tax you owe, which is more valuable than a deduction. Credits directly lower your tax bill, while deductions only lower your taxable income. Examples include the Earned Income Tax Credit, Child Tax Credit, and education credits.
Tax Deduction
An expense that reduces your taxable income. For freelancers, business deductions on Schedule C directly reduce the income subject to both income tax and self-employment tax. Common examples include home office expenses, business supplies, and professional services.
Try the related calculator →Tax Withholding
The amount of income tax an employer deducts from an employee's paycheck and sends to the IRS. Freelancers don't have withholding, which is why they must make quarterly estimated tax payments instead. If you have a side job with W-2 income, you can increase withholding there to cover freelance taxes.
W-4
The IRS form employees fill out to tell their employer how much federal income tax to withhold from their paycheck. If you freelance on the side while also working a W-2 job, you can adjust your W-4 to withhold extra taxes to cover your freelance income.