As an employee of a company, in most cases, taxes are automatically taken out of your pay. As a freelancer, you receive payments without deductions meaning you are responsible for paying these taxes: state, federal, Medicare and social security taxes.

Federal Tax Requirements
As an attachment to the 1040, freelancers need to report their profit or loss and business expenses on Schedule C. Find Schedule C at the IRS Web site http://www.irs.gov/businesses/small/index.html.

If you work from home, you may be eligible for a home office deduction. The IRS guide for business write-offs explains how to calculate your deduction http://www.irs.gov/taxtopics/tc509.html. Use form 8829 to take the deduction. All forms can be found at http://www.irs.gov/pub/irs-pdf/f8829.pdf

Don’t Jeopardize Your Medicare Eligibility
Aside from state and federal income taxes, freelancers pay social security and Medicare taxes, known as the self-employment (SE) tax. The social security tax rate for 2004 is 15.3 percent of your self-employment income, but only up to $87,900. Read more about the SE tax at http://www.irs.gov/businesses/small/article/0,,id=98846,00.html.

NOTE: You can deduct fifty-percent of this SE tax in the same year. This can be a large deduction, so don’t pass it up. Use Schedule SE which can be found at http://www.irs.gov/pub/irs-pdf/f1040sse.pdf.

Protect Your Social Security Benefits
Workers in the US earn social security benefits through a combination of employment, tax and credits. Each year you must reach a certain income level in order to receive the maximum amount of social security credits. For example, if you earned at least $3,600 in 2004 you earned the four credit maximum for social security that year. By reporting your income accurately and paying SE tax, you insure that proper social security for your future.