Sales tax: What is it and do freelancers have to pay it?

Sales tax is a state-level tax imposed on the sale of goods and, in many states, certain services. Unlike income tax, which you pay out of your own earnings, sales tax is something you collect from your customer and then pass along to the state. In other words, you’re acting as a temporary steward of the state’s money, not paying a tax out of your own pocket.

However, not every freelancer is required to collect sales tax. Whether you need to collect sales tax depends on what you sell, where you sell it, and whether your state taxes the type of service or product you offer. Sales tax rules vary dramatically from state to state, and the rise of online services has only made things more complicated. This is why two freelancers doing similar work in different states can have completely different tax obligations.

Do freelance business owners need to collect sales tax?

The short answer is: sometimes. The long answer depends on the nature of your business and the rules in your state. Some examples of when you need to pay and when you don’t are below:

1.  If you sell physical products you will likely need to pay sales tax. Most states require sales tax on tangible goods. This includes items like books, prints, merchandise, or anything a customer can physically hold. If you sell these items, whether online, at events, or in person, you’re likely required to collect sales tax. States generally treat physical goods as taxable by default, so freelancers who sell products often have the clearest obligations.
2. If you provide services you may need to pay sales tax. This is where the confusion for many freelancers in regard to sales tax begins. Some states tax services, others don’t, and some only tax specific types of services. 

For example, creative services such as writing, graphic design, or consulting are usually not taxed. However, digital products like templates, downloadable guides, or stock photos are increasingly being taxed as states update their laws to reflect the digital economy. Services like photography, beauty services, fitness instruction, and repair or installation work are frequently taxable as well. 

The rules vary widely, so it’s important to check your state’s specific guidelines and be cognizant of which states you are doing business in so you can track accordingly.

If you sell to clients in other states beware that you may owe sales tax in multiple states. The 2018 South Dakota v. Wayfair decision changed the landscape of online commerce. States can now require out-of-state sellers to collect sales tax if they meet certain thresholds, usually based on revenue or number of transactions. This concept is known as economic nexus. While most freelancers won’t hit these thresholds unless they sell digital products at scale, it’s still worth understanding the sales tax rules in the states where you do business so you can be sure to comply as needed and file sales tax returns as required.

How do freelance business owners calculate sales tax obligations?

To figure out your freelance sales tax obligations, you’ll need to look at several factors. 

First, check your state’s rules on taxable services. Some states publish clear lists of which services are taxable and which are exempt.

Next, determine whether your products (physical or digital) are considered taxable. Then, evaluate whether you have an economic nexus in any other states, either through physical presence or economic activity. 

Finally, review your sales volume to see whether you’ve triggered economic nexus thresholds elsewhere.

Most state revenue departments offer online guides, and a quick check with a tax professional can also clear up any confusion. It’s far better to ask early than to discover years later that you should have been collecting tax all along and then be faced with a sales tax bill.

What state-specific rules should freelancers know?

While the general principles of sales tax apply across the country, the details vary dramatically from state to state. Two freelancers doing the same work can have completely different obligations depending on where they live. To illustrate how different the sales tax rules can be, let’s look at two states: New York and California.

New York sales tax: Services are mostly exempt, but digital goods may not be.

In New York, most professional services are not subject to sales tax. This includes services like writing, consulting, graphic design, coaching, and other creative or advisory work. If your freelance business is service-based and you don’t sell physical products, you may never need to collect sales tax in New York. You can check New York State sales tax rules here. 

However, New York does tax certain categories that freelancers often overlook:

• Digital products such as downloadable software or prewritten digital content may be taxable. This means if you sell templates, stock photos, or digital guides, you may need to collect sales tax depending on how the product is classified.
• Photography services are taxable when the final product is delivered in a tangible form. If you deliver only digital files, the rules can vary, so photographers need to pay close attention and check
• Physical goods are always taxable. If you sell books, prints, or merchandise, you must collect sales tax from New York customers.

New York also has local tax rates that vary by county and city, so freelancers must charge the correct combined rate based on the customer’s location, again contacting a tax professional specializing in state and local sales tax now, may save you future sales tax issues.

California: Services are mostly exempt, but physical goods are taxable.

California takes a similar approach to New York in that most services are not subject to sales tax. Freelancers who provide writing, design, consulting, coaching, or other professional services generally do not need to collect sales tax in California. You can check the rules here. 

However, California is strict about taxing physical goods:

• Physical products such as books, artwork, merchandise, or printed materials are taxable. If you sell these items, you must collect sales tax from California customers.
• Digital products are generally not taxable if delivered electronically. This is good news for freelancers who sell digital downloads, templates, or online courses. However, if you provide a physical component, like a printed workbook, tax may apply.
• Photography services are taxable when the final product is delivered in a physical format. Digital-only delivery is usually exempt, but photographers should confirm the state and local sales tax specifics.

California also has one of the most complex local tax systems in the country. Rates vary widely by district, and freelancers must charge the rate based on their business location, not the customer’s location which is a key difference from many other states.

How do you collect sales tax for your freelance business?

Once you determine that you’re required to collect sales tax, there are several steps you must follow:

1. You need to register for a sales tax permit. This is essential because you cannot legally collect sales tax without one. 
2. After registering, you must charge the correct rate, which can vary not only by state but also by county and city. 
3. Then, you’ll need to track the tax you collect. It’s important to remember that this money is not income; it’s simply being held until you remit it to the state.
4. You’ll also need to file sales tax returns, which may be due monthly, quarterly, or annually depending on your state and your sales volume. 
5. Finally, you must remit the tax you collected. This process is entirely separate from your income tax obligations, and it requires its own system of record-keeping.

Keep in mind that sales tax does not appear on your federal income tax return. This is because sales tax is not income; it should not be included in your gross revenue. You’re collecting it on behalf of the state, and you don’t keep it, so it’s not taxable. Make sure any sales tax owed is tracked separately so it doesn’t inflate your reported income.

Does sales tax go on your freelance business state income tax return?

Generally, no. Sales tax is not part of your taxable income at the state level either. Instead, you report sales tax on your state sales tax return, which is completely separate from your state income tax return. Your state income tax return reports your earnings, while your sales tax return reports the tax you collected from customers. These are two different filings with two different purposes.

Educate yourself as a freelance business owner to avoid sales tax penalties. 

Sales tax can feel intimidating for freelance businesses, but once you understand the basics, it becomes much more manageable. Not all freelancers need to collect sales tax, and whether you do depends on your state and the nature of your work. 

Remember sales tax is never reported on your federal or state income tax return; instead, it’s handled through a separate state sales tax return and sometimes on a city-level return. Be sure to know your true sales tax nexus based on where and how you do business and always check with a tax professional if you have questions. This step alone can save you from owing sales tax that you were not aware of.