The tax consequences can be complicated, though not onerous. There are a few advantages to freelancing, as well as drawbacks.
Usually, you need to fill out a schedule C. That’s where you indicate all your freelancing income, as well as any expenses. Once nice thing about a schedule C is that you can take legitimate expenses off the top. I don’t have enough deductions to itemize on my tax return, but I’m able to deduct quite a few expenses on my Schedule C. As long as you can legitimately show they are part of doing business, they’re a legal write off. For instance, your office supplies, travel expenses, etc. can all be written off.
If you make more than $400 after you’ve taken your deductions, though, you need to fill out a Schedule SE for self-employment tax (i.e., Social Security). It’s twice what you usually pay for SS
but you get to write half of it off on your Form 1040 (line 30). There are also some other deductions on the 1040 adjustments to income.
In addition, if you’re making enough to live on, you need to fill out an estimated tax (1040 ES) form to pay your equivalent of withholding. You need to pay this in advance or be hit with penalties. It’s a simple form – you estimate your income, then pay a quarter of that amount every three months.
All these schedules (except the 1040ES) are in your basic 1040 tax packet and all the information is built into the forms. I don’t know about your state tax, but in NY, the tax form merely has you copy the information from the Federal form; you need to also include a copy of your Federal Schedule C with your state return.
You don’t need to incorporate unless you are making a large amount of money – the incorporation taxes and fees put it out of reach of most freelancers, anyways.
It helps if you have an accountant, but you can do it yourself; most tax prep software will guide you through the process.