How to Pay Taxes as a Freelancer
Taxes can be a freelancer’s nightmare. The amount that a freelancer has to pay in taxes may seem like a guessing game until tax season. If you’re a freelance worker or self-employed, you must understand how to pay taxes early to avoid any surprises come April.
When do Freelancers Pay Tax?
As a freelancer, if you earn more than $400 from a single client/customer, the IRS classified you as self-employed, and you are obligated to report this income in your annual tax return.
Taxes are pay-as-you-go for freelancers in the United States. You must make quarterly estimated tax payments to the IRS if you expect to owe at least $1000 in taxes, and your withholding and tax credits are less than 90% of your tax liability for the year (or 100% of your tax liability for the previous year, whichever is smaller). You make quarterly payments in April, June, September, and January.
If you underpay your quarterly taxes, depending on the amount, you may have to pay it when you file your taxes, or you may be subject to a late fee penalty.
How Much Tax Do Freelancers Have to Pay
Freelancing has many benefits, but some argue that one of the major downsides of the trade is paying your taxes. Not understanding taxes is a common mistake among first-year freelancers excited by the unlimited potential of income and ability to be your own boss, and especially common for those who come from traditional jobs.
Owing thousands of dollars in back taxes is daunting if you are not prepared. However, with some understanding of how much you might have to pay in taxes during tax season, back taxes become more manageable as you know how much you should be saving throughout the year.
You need at least a basic understanding of how much in taxes you have to pay back.
As a self-employed individual, you’re in charge of the taxes that are automatically deducted from your pay if you were an employee, including your Social Security and Medicare taxes. Because you are self-employed, meaning you are your own employer, you’re also responsible for paying the employer half of these standard taxes, which is 15.3%. This is called a self-employment tax.
How to Calculate Self-Employment Tax
To calculate your taxes, you must calculate your net earnings for self-employment for the year. This number is your gross income minus your business expenses, and you use IRS Schedule C to calculate this amount.
Generally, 92.35% of your net income is subject to self-employment tax. Once you determine that number, apply the 15.3% tax rate.
From there, you must also pay income taxes based on your tax bracket. Freelancers may also have to pay state income taxes as well as local taxes.
You need to provide your Social Security Number (SSN) or individual taxpayer identification number (TIN) when you pay the tax.
Tips for Paying Taxes as a Freelancer
- To stay ahead of your taxes, continuously update your income and expenditures. You may even want to keep a savings account solely for your taxes and set aside money every time you get paid. Financial professionals recommend saving 30% of your income for taxes.
- If you’re having trouble keeping up with your taxes, consider hiring a tax professional, such as an accountant. The IRS constantly updates its tax laws, and taxes may become increasingly complicated to calculate as you acquire more clients and income. Consulting an accountant may be the safest way to help ensure that you are filing your taxes correctly. Be sure that this tax professional thoroughly understands how you conduct your business so that they may help you get the deductions and credits that you deserve.
- Learn what you can and cannot deduct to help save you money during tax time. You may be able to deduct expenses such as home office expenses, hardware, and software, or travel expenses. Many freelancers do not know what is deductible; therefore, it may be worth consulting a tax professional to help you.
- If you are a freelancer married to a spouse with a traditional job, you may have them increase their withholding to lessen your tax bill.
- Don’t expect to earn a tax refund as a freelancer. It is uncommon that freelancers overpay their quarterly tax, which is the only circumstance in which they would receive a refund.
- Freelancers need to keep detailed records of their payments and expenses. Always have these documents ready in case the IRS requests them.
Tax Forms for Freelancers
Freelancers receive a 1099-NEC form from every client who paid them $600 or more. This form was formerly the 1099-MISC form, but it changed in 2020. You must report the income on your 1099-NEC, although you do not have to submit the form to the IRS yourself, as your client will have already done that.
If you do not receive a 1099 misc form from one of your clients, contact them and request that they send the form to you as soon as possible. If you still don’t receive it, review your deposits. You must include the dollar amount received in payment in your tax return.
As mentioned, freelancers must use Schedule C to claim their self-employment income and business expenses and calculate their net income.
Preparing Your Taxes as a Freelancer
Freelancing may have many perks, but freelancers must keep up with their business income and expenses to pay the proper amount of taxes to avoid any penalties from the IRS. The best way to do this is to track your income and expenses and save a portion of your income for tax purposes. Understanding the different taxes that you have to pay and regularly calculating the amount owed will make tax season as a freelancer much more manageable.
Being a freelancer can be tough, but FormPros can make it easier. FormPros provides access tax documents that every freelancer may need, such as 1099 forms, W-4 forms, pay stubs, and contractor agreements to save you time and stress come tax season.