The freelance industry in the US alone is worth more than $1 trillion. More and more people are joining the ranks of freelancers for a more flexible work/life balance.
And while everyone focuses on the many benefits of working freelance, such as taking charge of your schedule or traveling while working, there are a lot of confusing things, too.
Freelance taxes are one of the biggest hiccups. When you’re working a W2 job, income taxes are straightforward. But taxes for freelancers is tricky due since you don’t have an employer helping cover your taxes. Plus, you get to take tons of deductions.
So what do you need to know when filing income taxes when during self-employment? Keep reading below to learn important freelancer tax tips now.
What Do Employers Do?
When working a W2 job, your employer will pay taxes on your behalf. Well, actually, they will withhold some of your wages from each paycheck and send it to the IRS. They are helping you to pay your income taxes automatically.
Each year during tax season, you just need to file a return. Usually, you don’t need to pay any additional taxes. In fact, you might even get a refund if you’re employer withheld too much from your paycheck.
As a freelancer, however, you need to pay taxes to the IRS directly. You don’t get standard paychecks and no one pays your taxes for you. So you need to report how much money you’ve made, provide proof, and then send the appropriate amount of money to cover your income tax liability.
Sometimes, the people who pay you for your services will issue a 1099 form (rather than a W2). This makes it much easier to calculate your freelancing income tax.
What Freelance Taxes Do You Pay?
So what taxes do you need to pay? You don’t just pay taxes once. Most people get to do it three times.
You pay taxes to the federal government (you know, the folks in Washington DC).
You’ll also pay state income taxes (unless you live in a state like Florida that doesn’t collect income tax). And you’ll pay local taxes, depending on the city you live and work in.
For many people, that’s three separate tax burdens. However, most of it will go to the federal government. Only a little bit trickles down to the others.
Freelancer Deductions
The best part about freelancing, and the most confusing, is claiming deductions on your tax return. You don’t just pay tax based on your revenue. You’re a business.
Every expense you pay to manage your business can be deducted from your income. So if you buy a new computer for work, you can lower your tax burden.
If you pay for internet, supplies, transportation, software, and advertising expenses, you get to deduct those as well.
Deductions can be a powerful tool to limit your tax burden. To maximize the amount of money you save, working with professional tax preparation services is well worth the money.
They will ensure you pay as little as possible to Uncle Sam so that you can keep more of your hard-earned money.
Make Your Taxes Work for You
Freelance taxes are a major burden. But if done properly, they can be a powerful tool to help you save more money, making self-employment more profitable and more enjoyable.
So make sure you take your time when doing your taxes or hire a professional.
Looking for more tax tips? Visit our blog now to keep reading.
