As a freelancer you’re your own boss. You get to choose your gigs, work on your own schedule as and when you like! However come tax season and you’re probably scrambling for help on how you should file your tax returns, what forms you need to fill, how much tax you’d have to pay, and so on.
Now it’s time to get rid of the burden and worry that accompany tax filing. Paystubs 365 provides some simple and valuable guidance on freelancer taxes. Get ready to familiarize yourself with the basics of taxes for the self-employed and freelancers.
How Do Freelancer Taxes Work?
Freelancer taxes are slightly different from the taxes that salaried professionals and wage earners are liable for. In traditional employment, taxes automatically get deducted from every paycheck. While freelancers don’t receive a paycheck they still owe federal and state taxes. But instead of taxes being automatically deducted at the source, every time payment is received for a gig, freelancers are supposed to pay taxes on a later basis on the amount earned.
Who Qualifies As A Freelancer?
Anyone who is self-employed or works as an individual contractor, performing work for one or more clients for a fee, is regarded as a freelancer. As opposed to a full-time job where employees perform the tasks assigned to them, based on the conditions and pay rate largely established by organizations, freelancers can choose their own clients, work hours, and rate of pay. Some individuals choose to work only as freelancers while others work full-time jobs and take on additional gigs in the remaining time.
All those of you who’re working solely as freelancers or as salaried professionals moonlighting as part-time freelancers, you’re required to pay taxes on your freelance earnings. Therefore, whether you’re paid through your own website, online freelancing or payment platforms, or via check, all taxes for freelancers including self-employment tax will be applicable.
Freelancers who have made more than $400 are required to pay self-employment tax – a special tax filing for self-employed people. The self-employment tax is paid to the IRS through the Form 1040 Schedule. This tax includes both portions of Social Security and Medicare – what an employee and employer would pay.
The self-employment tax rate for 2021 is 15.3% on the first $142,800 of net income. It includes 12.4% for Social Security and 2.9% for Medicare. Since freelancers pay self-employment tax for both employer and employee – they may qualify for a 50% freelancer tax deduction on it.
Federal & State Income Tax
Federal income tax is based on the taxable income. Freelancer income tax rates can be anywhere from 10% to 37% depending on the earnings. Again Form 1040 will be used to report federal income tax.
Barring a few states, almost all other states have a state income tax. Typically the state where you work is the one you owe taxes to. Some states have a flat tax rate while others have different tax ranges based on the income bracket. Freelancers who earn income in multiple states may have multiple state income tax liabilities, which requires them to file multiple tax returns.
Quarterly Tax Payments
The IRS states that sole proprietors and partners must make estimated tax payments if they think they may owe $1,000 or more taxes at the time of filing. So many freelancers pay quarterly taxes that are due each quarter.
Given that freelancer taxes are not deducted from the paycheck, it’s necessary to budget funds towards taxes in order to avoid a big financial setback, come tax season. It’s considered good practice for the self-employed and freelancers to prepare for tax season by saving 25-30% of their income for tax payments.
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