Freelancing is ideal when looking for a level of flexibility that doesn’t come with traditional jobs. Other benefits of freelance jobs include control over your workload, exposure to broader horizons, and job independence.
The growth of freelancing is undeniable. Upwork’s Freelancing in America survey suggests that 56.7 million Americans did freelance work in 2018. According to Statista, about 59 million people were freelancers in 2020.
These numbers suggest that more than one in three Americans are freelancers. However, the freelance journey isn’t entirely smooth sailing. You have to think of taxes.
Paying Taxes as a Freelancer
The first step is understanding the taxes you need to pay and what you can deduct. Take advantage of these practices to make sure you are doing things right.
- Learn the Basics
Even the best freelancers must be willing to take a step back and learn. Even if you already understand the industry, you need to learn how taxes apply to you. Get a basic understanding of accounting and how different principles apply to your business.
Here are the basics:
- Freelance Tax Forms
Instead of the W-2 forms that traditional employees get, you will get a 1099-MISC form for each client paying $600 or more. You can report 1099-MISC income on a Schedule C attachment.
- Freelance Tax Requirements
If you are a freelancer expecting to owe a minimum of $1,000, you have to pay your estimated taxes quarterly. It is assumed that employers won’t withhold freelance income all year.
You can use IRS Form 100=ES to estimate the amount you’ll owe in quarterly taxes. It would be best if you got the estimates as close to the actual figures as possible.
Underpaying means, you’ll still owe the IRS. It could also attract a fine. In addition, you may need to pay both state and local taxes.
- Self-Employment Tax
If you make at least $400 annually from freelance work, the IRS considers you to be self-employed. You have to file taxes as a business owner. You must pay a 15.3% self-employment tax in addition to your standard income taxes.
It represents half of the Medicare and Social Security taxes you typically pay and the half that traditional employers cover.
If you are unsure how much you need to pay in taxes or your tax deductions, enter the info into a small business loan calculator.
- Hire Tax Professionals
Consider bringing in a CPA or an accountant to establish your tax requirements and privileges. Since they are familiar with freelance taxes, they will guide you through different processes.
While you can file taxes on your own, situations are constantly changing.
What works now won’t work when you are in a different financial situation. Filing your own taxes requires that you track all your statements and receipts. You have to understand what each one means. In addition, the IRS is constantly updating its tax laws. Working with a professional will make things easier for you.
- Think Daily Rather than Quarterly
Tax professionals suggest that you look at your tax-related details every day. Update details of your expenditure and income as you receive them. Staying on top of your finances improves the accuracy of your records. It is also less stressful than rushing around to get your figures before meeting your accountant.
Even if freelancing is a side gig, the IRS considers it your business. You cannot afford to slack on taxes. Think of them as part of your daily operations. Keep accurate details and update information as soon as you receive it.
In conclusion, running a freelance business can be exhilarating. You can choose your clients, set your working hours, and decide on the projects you want to pursue. Being your boss has plenty of perks. It is no surprise that more people are pursuing this path.
However, the issue of taxation can be complicated.
Consider using the appropriate software or working with accounting professionals to keep accurate records. You don’t want to get in trouble with the IRS because of ignorance or inaccurate calculations.