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The Lowdown on Taxes for Freelancers

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As you begin your freelancer journey, you might be wondering: 

How do taxes work for freelancers?

The thing about being a freelancer is that it means you’re technically self employed—and there are a few differences involved in filing taxes for freelancers as opposed to filing them when you’re an employee who works for a company.

So in this post, you’re going to learn some of the most important tax differences for freelancers. 

These simple points will help you to prepare for filing taxes as a true self-employed professional—helping you to make the most of the opportunity, and to save yourself some ‘headaches’ along the way.

Let’s dive into it. 

1. You Have To Pay Taxes On Freelance Income

Everyone has a responsibility to pay taxes on their income, regardless of whether they’re working for themselves or working for someone else. 

But here’s the thing:

As a freelancer, you’re not going to be able to rely on your employer to handle withholding your taxes for you. 

That’s something that you’re going to have to do for yourself from now on. 

2. What Types Of Taxes Do Freelancers Have To Pay? 

Freelancers need to pay several different types of taxes. 

In addition to federal income tax and state income tax, you’ll also need to pay self employment tax, local income taxes, and possibly sales tax (if you sold any goods during the tax year). 

This can get rather complicated! So let’s talk about the part that most freelancers tend to get most confused about—the self employment tax. 

3. Self Employment Tax

Self employment tax is really the tax that differentiates regular employee income taxes from the taxes that freelancers need to pay.

If you were an employee, this portion of your taxes would actually be paid by your employer. 

But since you are now a freelancer and self employed, you’re responsible for this extra portion of taxes.

The federal self employment tax rate is currently sitting at 15.3%

This means that you’re going to need to hold back an extra 15.3% of all of your freelance income in order to pay this tax when it comes due.

But here’s the tricky part—this doesn’t include income tax or any other types of tax!

But we’ll talk more about that in a moment. 

4. Estimated Tax Payments 

As a freelancer who plans to have a tax liability of greater than $1,000, you’re required by the IRS to make what are called estimated tax payments

In other words, you’ll need to make your yearly tax payments in quarterly installments instead of all at once on tax day.

You can make estimated tax payments directly through the IRS website—or you can submit them with a form 1040-ES.

Quarterly payments are due on April 18, June 15, September 15, and January 18 of the following year, respectively.

These days, however, may change slightly year to year. 

So always double check on the IRS website to make sure that you’re making your estimated payments on time. 

5. How Much Should You Hold Back For Taxes? 

When freelancers first get started, one of the biggest mistakes they tend to make on the tax side of things is not holding back enough money for taxes

As soon as you get paid for a project, it’s always a great idea to hold back a certain percentage of your income to make sure that you’ve got the money set aside for taxes.

You need to have a separate bank account that’s specifically dedicated to the purpose of holding your tax funds.

As a general rule, you’ll need to set aside about 30% of your self-employed income to cover all of your various different types of taxes (until you reach a certain level of income, at which point that tax rate may indeed increase). 

However, some freelancers hold back even more than this—thus creating the effect of a tax return after tax season hits. 

For example:

Some freelancers actually hold back 50% of their income for taxes. 

Then, after paying their taxes in quarterly amounts and additionally covering any other government/tax fees that they may need to cover, they’re able to give themselves a lump sum of cash after tax season or roll it over into the following year’s tax fund to help cover fees the following year.

6. Isn’t That A Lot Of Taxes? 

At first, you may start to feel like that’s a lot of taxes

However, that’s just part of the gig when it comes to being a gig worker or freelancer.

This is why it’s so important for freelancers to actually charge what they’re worth. Freelancers need to make sure that they’re asking for enough money for their services that they can cover all of their bills, legal fees, and taxes on top of it all. 

Businesses that fail to make enough to cover essential expenses and taxes will quickly find themselves in trouble when the time comes to make estimated tax payments. 

So make sure you’re charging what you’re worth.

7. Hire A Tax Professional To Help You 

For best results, you may want to hire a certified CPA or tax professional. An expert tax professional can help you check for the possibility of extra write offs or credits when it comes time to file taxes. 

You can generally write off most of your business expenses when preparing your taxes.

But the other part of it is this:

Taxes can be a complicated affair. 

And hiring a certified tax professional can help you make sure that you’re taking all of the necessary steps to avoid costly tax problems in the long term. 

Need an in-depth guide on how to file your taxes?

Check out this post by Gigly: How To File Self Employment Taxes

Conclusion 

There you have it. 

A quick start guide with everything you need to know about how to pay taxes as a freelancer. 

Armed with this knowledge, you can now get started on a successful tax season for your freelance business. 

Freelancers are amazing, and we believe in you.

Now it’s time to get out there and change the world. 

 

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