Freelancer is the one who is his own boss, which is a great thing. It is totally depend on a freelancer that how much time you want to spend on your work, on which type of projects you want to work and in which location you want to do your work etc this all are up to you as a freelancer. As a freelancer you can work with your full time job. Freelancing is a fantastic way to increase your income, even if you already have a full-time job.
It will affect how you file your taxes, whether you are a full-time freelancer or just starting out on the side. If you do not create your tax bill properly then it could cause you to lose a significant portion of your freelance income. It is because if you compare tax of a employee with tax of a freelancers then the highlighted point is that the way of filing tax of both are very different.
Table of Content
- 1 Taxes Between Working as an Employee and a Freelancer
- 2 Fundamentals of Tax for Freelancers
- 3 Taxes Paid By Freelancer
- 4 Way of Paying Tax by a Freelancer
- 4.1 Understanding the Basics of Freelance Tax
- 4.2 Structure of Your Business
- 4.3 Hiring of Professional for Tax
- 4.4 Estimating of Quarterly Tax
- 4.5 Thinking of Daily in Place of Quarterly
- 4.6 Announcement of Your Business Income
- 4.7 Preparation for the Tax Day
- 4.8 Standard Deductions
- 4.9 You Can’t Deduct Everything
- 4.10 Never Expect Tax Refund as a Freelancer
- 4.11 Planning for Retirement be a Priority
- 5 Tax Deduction for Self Employment
- 6 Frequently Asked Questions
Taxes Between Working as an Employee and a Freelancer
If you are an employee then it means that you don’t have to stress about your taxes. This is due to the fact that it is the job of your company who determines the appropriate amount that should be deducted from your salary and paid as a tax. After paying the tax, the IRS and the state tax authority will receive the taxes. It is your responsibility that you have to file a tax return annually on a time.
If you are working as a freelancer then it means that you are an independent contractor and no one else is responsible for taking care of your tax obligations, you have to do it yourself. As a freelancer you must regularly file your taxes with both the IRS and your state which is a little tricky task. You have to check your own that how much and how you have to calculate and pay tax.
It is important for the freelancer that you will maintain accurate records of your business’s income and expenses in order to file all the necessary paperwork. It is very important and helpful for you to file your yearly tax return.
Also, If you won’t report the amount on your W-2, then it will make your tax filing more challenging. So, as an alternative for all you must disclose and deduct all of your freelance income.
Fundamentals of Tax for Freelancers
There are three main fundamentals for the Freelancers in order to pay tax.
The Minimum Amount you have to Earn in order to Pay Tax as a Freelancer
As a freelancer if you are earning $400 or more that it in a year then you must pay taxes for this.
In the case of your full time work, yours Social Security and Medicare taxes will be automatically deducted from your paychecks and your employer will pay for half of those taxes. But, if you work as a freelancer then you have dual employment status. The IRS requests you to pay the full 15.3% of your income as tax.
For a freelancer your self-employment tax is calculated by using the Schedule SE tax form, and it is then reported on your regular Form that is Form 1040. On your 1040 form you are allowed to claim a deduction for the 50% employer-equivalent component for your self-employment tax.
The self employment tax is also in the standard income tax rate. So, always try to save 2530% of your freelance checks in other savings account, which is used to pay both your Income Taxes and self-employment taxes. This will be very helpful for you to save from large tax charges.
Correct Time to Pay Freelance Taxes
If your income is at least $1,000 in a year when you have to pay tax then you should make payment quarterly for tax. This is the rule of IRS. Since throughout the year no tax will be deducted from your freelancing income then you probably need to project your taxes for the following year and then pay to the IRS on the quarterly basis.
There is no need of paying tax payments if you are earning a few thousand dollars or less then it per year from your freelancing job and you just need to record your earnings when you file your tax return.
But, if it appears then you will owe $1,000 or more in the taxes, Form 1040-ES can help you in predicting that how much money you will make throughout the year and then on that basis of the prediction you can calculate your taxes for your projections.
Since these are only estimates so you will be required to pay any taxes that you will not cover when you submit your yearly tax return.
If you overestimate your tax liability then you will get a tax refund for the extra money.
Taxes Paid By Freelancer
Following are the taxes which is important for freelancer to pay:
If you are working as a self-employed freelancer then you should pay regional taxes.
- There are almost 5,000 cities, counties and other local governments which imposes their own income taxes.
- There are several regions likewise which imposes annual business taxes or registration fees.
- In order to find out that you have to pay local taxes then you should consult the website of your local government or the chamber of commerce in your area.
Following are the sales tax which is needed to be pay when you work as a freelance:
- There are some sort of sales taxes in most of the states and many municipalities. These states are the only states in which there is no sales tax.
- The public sales of goods or products are subject to sales taxes in all of the states. If you are offering service to customers then you don’t need to bother about the sales tax.
- Most of the states don’t have tax services at all or only some services are subject to taxation. All the services are subject to sales taxes with little exceptions.
- To obtain a state sales tax permit, you must submit applications if the goods or services which you offer are subject to sales tax. So, you must locate your state’s sales tax department and gather all the details which you need to obtain your permit in advance because many jurisdictions imposes fines for making sales without a permit.
Each and every state has its own set of rules for tax, Which you have to follow:
- In case of enterprises and independent contractors each state has its own set of income tax laws.
- Your state income taxes must be paid annually in the form of the estimated taxes. They are frequently paid along with your federal anticipated taxes.
- Annual state income tax returns must be submitted to the state tax office.
In case You are Hiring Employees
- You have to deduct State Income Taxes from your workers paychecks and transfer that deducted amount to your state tax office.
- By paying taxes to your state unemployment compensation agency then state tax will be required in order to provide employees with unemployment insurance.
Following are the federal taxes which you have to pay:
- Whenever your freelance firm makes profits then you will be required to pay personal income tax.
- Till April 15 of each year you must submit your annual income tax returns. The prior year income and deductions must be shown along with the amount of estimated tax which you paid.
- You must pay for the Social Security and Medicare taxes which contribute to the funding of those programmers because independent contractors have the same rights to Social Security and Medicare benefits as employees whenever they are retire. They are frequently referred to as self-employment taxes or SE taxes and then you must pay them to your net annual self-employment income which is $400 or more.
In case You Hire Employees:
- For your employees there is need to pay federal employment taxes by you. They are made up of the all the federal unemployment tax plus half of your employees Social Security and Medicare taxes.
- All of your employee’s income taxes the other half of their Social Security and Medicare taxes must be deducted from their paychecks.
- These taxes must be paid to the IRS by electronic deposit every month or in every two months.
- You must keep track of everything so you can properly complete your quarterly and yearly employment tax returns with the IRS.
Way of Paying Tax by a Freelancer
The greatest freelancing tax procedures are listed below which might help you follow the law.
Understanding the Basics of Freelance Tax
All type of owners whether they are sole proprietors or well-known CEOs they all need to have a basic understanding of accounting and taxes if they want to make your money work for them. Following are the three tax basics for freelancers:
Forms for Freelance Tax:
Any customer who pays $600 to a freelancer or more then they will send 1099-MISC form in place of the annual W-2 form that a regular employee would receive. In Schedule C in order to attach it to your tax return then you must include your 1099-MISC income.
Tax Requirement of Freelancer:
Employers who never deduct a freelancing income throughout the year then those employers must anticipate owing $1,000 or more in taxes which must pay estimated taxes quarterly. It is important to get these payments as close to the actual amount which you are using in IRS Form 1040-ES. It can assist you in estimating that how much tax you will owe each quarter.
Tax for Self Employment:
If you are working as a freelancer then the Internal Revenue Service (IRS) always considers you as a self-employed and they requires that you must pay taxes as a company owner if you are making $400 or more in a year. You must pay a self-employment tax of 15.3% in addition to the ordinary income taxes which is based on your tax bracket and filing status. This tax must be equal to your share of the Social Security and Medicare taxes which you would pay as well as the share which is covered by a traditional employer.
Structure of Your Business
Most of the freelancers file their taxes as sole proprietors, who are required to attach a Schedule C form to their personal tax return.
The sole proprietorship is a fantastic choice since it is very helpful in protecting your personal assets. It is a company which is more complicated and expensive in order if you want it to be set up.
Independent contractors who set up a corporation or LLC must pay unemployment insurance, federal, state, and half of the FICA tax.
Hiring of Professional for Tax
By keeping the track of all your receipts and statements while comprehending their meaning is the requirement for self-filing for your taxes. Each and every transaction must be counted, so if your finances are a mess then it is better for you search someone else in order to pay and organize all.
As the IRS regularly modifies its tax laws then it is need to understand how all these changes affect you for which you might require some assistance.
Estimating of Quarterly Tax
Freelancers must pay estimated taxes on a quarterly basis if they owe at least $1,000 in taxes. To determine the appropriate quarterly payment amount the one must consult to your tax return from the previous year.
Thinking of Daily in Place of Quarterly
It is always advisable by tax experts that the independent contractors who are dedicate to the time each day in tax-related tasks like updating of income and expenses as they changes in sheets then your records are more accurate as you are keeping the track of your finances. Then you don’t need to run in a panic before the week of your accountant appointment.
Announcement of Your Business Income
Any of the business who uses to pay a freelancer more than $600 during the tax year, then it is required to give 1099-MISC form to them by January 31. In case you did not get a Form 1099 then you must declare all of your income which includes cash payments also.
It is difficult to file accurately and on time even if you are unable to pay your taxes. If you are in good standing position then you might be eligible for IRS taxpayer programs which can extend your payment deadline.
Preparation for the Tax Day
By doing so it becomes much simpler for a freelancer to prepare their tax return by assisting all of them in figuring out its profit or loss. Also, by using the financial software makes it simpler to categories spending for and by you.
The large number of independent contractors will miss out on significant tax breaks and benefits because they are unsure of what they are and are not allowed.
A few typical deductions which are used by independent contractors are as follows:
- Office Space at Home
- Cost of Vehicle
- Cost of Travelling
- Phone and Internet Bills
- Health Protection
- Hardware and Software for the Office Materials for Advertising
- Professional or Legal Services
- Licenses and Taxes for Your Contract Workers
- Business Lunches
Car expenses are another typical tax which is deductible for independent contractors. By maintaining careful records of your spending, you can easily compare the standard mileage rate with your real vehicle costs to know that which one provides you the greatest tax deduction.
Home Office Expense:
You are eligible for the home-office deduction if you operate from your home as a freelancer. You can deduct costs like electricity and rent for the area of your home which you are using as your main workplace.
Premium for Health Insurance:
If your spouse does not have access to an employer-sponsored health plan then you are able to deduct the cost of your health and dental insurance otherwise not.
You Can’t Deduct Everything
Personal expenses such as personal mobile phones are never tax deductible but, if you want to write off your cell phone then you must purchase a second phone which is used for business.
Never Expect Tax Refund as a Freelancer
If you are doing a job then your taxes are routinely deducted from your pay, but in case if you overpaid the government for the year, then you might be eligible for a refund. Since you are the one who is paying the money which you owe, this is less likely occurring in case if you are working for yourself.
Planning for Retirement be a Priority
Retirement preparation is not a high focus for freelancers. They are completely concentrated on the daily tasks as they are involved in expanding their company and acquiring new customers. The fact that they cannot participate in employer-sponsored small business retirement plans as sole proprietors, it may also make them feel as they have few other options. Some plan options for freelancers are:
- 401(K) Self Employed: A self-employed 401(k) plan can be an excellent choice for an independent contractor or business owner who does not have any employees outside their spouse.
- SEP IRA: Simplified Employee Pension (SEP) IRA plans are another method to put money down for the retirement. You can put as much as 25% of your net earnings into a SEP IRA as you like it is up to a maximum of $61,000.
- Roth IRA: One of the easiest methods for a freelancer is to begin saving for retirement with a standard or Roth IRA.
Tax Deduction for Self Employment
Tax Deductions help you to pay less in taxes overall by lowering your taxable income, which might save your hundreds of dollars. As a freelancer, you can claim many of them. As a independent professionals you can’t use tax deductions. So due to this some of the independent contractors are paying more taxes than it is required.
You can deduct expenses as a freelancer if they are ordinary and essential for the running of your firm.
The following are some of the most typical deductions for freelancers:
- Marketing and Advertising
- Office Equipment
- Equipment and Software for Computers
- Travel and Food for Work
- Office at Home
You have to prove that these expenses were necessary for your business, as it will save your money come tax season which is helpful in documentation and meticulous bookkeeping such as retaining all of your original receipts and invoices.
You have to open a second bank account exclusively for your freelance business in order to make the process of tracking of your spending easy. It is a good method of keeping your personal and professional finances separate which is very helpful for you to keep track of your spending so you can write them off when you are filing your taxes.
Now, as a Freelancer whenever you file tax, we hope the information above will be useful to you. If there is any issue then give a chance to our tax professional in order to pay your tax. Our tax professionals will provide Live Full Service and are accessible to assist you in any way. We will ensure that you receive thorough service in addition to enabling you to submit your own taxes. We will take care of your all type of tax issues. We are the best tax preparation firm, so you may file with us with confidence.
Frequently Asked Questions
How about Creating an LLC?
If your LLC just has one owner, as it is in the case of independent contractors then it is regarded as a disregarded business for tax reasons. So, you are treated exactly the same as a sole proprietor for tax purposes because it is as if the LLC doesn’t exist.
The tax treatment of your LLC is often the same as a partnership if it has two or more owners.
What are the Best Accounting and Tax Software’s for Freelancers?
Following are the best accounting and tax software’s for the freelancers:
• Fresh Books
• Cloud Accounting for Sage Business
• QuickBooks online by Intuit
How can You Stay on the Top of Your Freelance Tax?
Taxes are a reality for independent contractors. You must notify the IRS for any freelancing income that exceeds the income more than $400. The IRS views your freelancing work as a business, allowing you to deduct expenses from your revenue. It’s advisable for you to get the advice of a tax advisor while setting up your books and filing your first year taxes in order to prevent costly errors.