Being a freelancer has several advantages. You work on your own time, on projects of your choosing, and at your own pace. It’s a terrific opportunity to earn additional money doing something you’re good at – or, even better, something you enjoy, whether it’s your full-time work or just a side gig! However, there is one caveat: being self-employed means you are solely responsible for calculating and paying your freelancing taxes.
In a typical job, you fill out a W-4 form when you are employed, and your company deducts the applicable taxes from your paycheck automatically, If that doesn’t happen you can always use a paystub generator. When you file your tax return each year, you can usually count on receiving a large check from the IRS. However, as a freelancer, it is not so simple. Your taxes aren’t deducted automatically from your paychecks, so it’s up to you to make sure you pay enough and on time.
Of course, this doesn’t mean you shouldn’t work for yourself; it just means you need to know what you need to do to avoid any major shocks come tax season.
What exactly is freelancing taxation?
When you work for a corporation, you must pay income tax as well as FICA (your Social Security and Medicare contributions) on every paycheck. Because it is not deducted automatically, you are expected to pay this as a self-employed individual. Visit Daily Prosper to know if can self-employment payments be garnished.
Your income tax rate is, of course, determined by your earnings. However, if you are self-employed, the FICA part is slightly different. Whereas ordinarily the employer contributes half of FICA and the employee contributes the other half, as a self-employed individual you are also the employer and must pay the entire amount. The effective “self-employment tax rate” is 15.3 percent on the first $128,400 in income and 2.9 percent of anything earned over this amount.
Fortunately, you can deduct the employer portion of self-employment taxes on your tax return; however, you must account for the entire amount. In any case, you will have to pay both your income tax at the rate determined by your bracket, as well as the 15.3 percent self-employment tax.
What exactly is 1099?
In contrast to a “regular” job, where you receive a W-2 from your employer at the end of the year, any firms who pay you more than $400 in a year for freelance work will issue you a 1099-MISC.
However, many firms now pay their contractors using services like PayPal, so they submit a somewhat different form, a 1099-K. Unfortunately, they are only required to send one if they pay you more than $20,000 or more than 200 times.
Whether you receive 1099 from your customer or not, you must report and pay taxes on your earnings, therefore it’s ideal if you keep track of your revenues yourself. This income is reported on Schedule C of your normal 1040 tax return.
The form is designed to account for both your self-employment revenues and expenses, as well as to assist you in calculating your net taxable income from freelance work. Completing Schedule SE along with Schedule C on your return simplifies the process of tying your taxable self-employment income into your 1040.
Creating an estimate of your freelancing taxes
Even if you summarize your self-employment earnings on your annual return, you must pay estimated quarterly taxes to the IRS if you expect to owe more than $1,000 in taxes from freelancing income. Tax payments are due quarterly in April, June, September, and January.
You can use Form 1040-ES to estimate your annual taxes based on how much you expect to earn. If you earn less than $2,000 per year, you may generally avoid paying estimated taxes, but if you’re unsure, it’s advisable to make quarterly payments to avoid fines.
It can be difficult to predict your annual profits, especially if this is your first year as a freelancer or if the amount or type of work you do will differ from past years. In any event, you should try to estimate your earnings and costs, compute your net taxable income, divide it by four, and pay around 28 percent of the total each quarter. The good news is that if you overestimate, you will receive a refund when you complete your tax return!
Make the Most of Your Tax Breaks
On the other hand, you should keep meticulous records of your freelance expenses. As a self-employed individual, you can claim tax deductions for any expenses that are “ordinary and necessary” for the running of your business, according to the IRS. Expenses are reported on Schedule C of your Form 1040, just like earnings, but if you have less than $5,000 in expenses, you can also utilize the Schedule C-EZ to simplify your net taxable income. In any case, there are numerous types of expenses to consider and track. Among the most typical expenses are:
- Marketing and advertising
- Supplies for the office, as well as computer hardware and software
- Business dinners and travel
- Utilities for the Home Office
- Certifications & Education
While deductions can have a significant impact on your tax payments, make certain that you can verify and justify any claims you make. Remember that the items you deduct must be “ordinary and necessary” for your business, thus a good rule of thumb is: if you would have an item or a cost even if you weren’t running your freelance business, you shouldn’t claim it. Whatever you decide to deduct, retain all of your bills and receipts so you can prove your spending if necessary.
Taxes are, at the end of the day, difficult. Even with this instruction, it’s a good idea to seek the advice of a professional. In most circumstances, they will be able to save you more money than they will charge you! If you don’t want to go out of your way to find a local tax expert, you can use a website like Picnic. They have a large network of online experts, allowing you to get exceptional advice and help from the comfort of your own home.
While working as a freelancer provides you with a lot of freedom, it does come at a cost. While you should not let the rigorous independent contractors tax process prevent you from pursuing side employment or starting your own business, you should be informed and prepared. It’s simple once you get the hang of it: track everything, place money aside as you make it, make projected payments, and don’t be afraid to ask for help!