About 59 million Americans performed freelance work in the last year, which is 36% of the entire workforce.
Freelancing is a great way to earn extra income and have the freedom to work when you choose. Those bright spots attract millions of people to do freelancing work.
Yet, there’s a bit of a shadow that hides from freelancers. The freelance tax. Freelance taxes are often a surprise until it’s time to file taxes.
Freelancers get stressed about a huge tax bill that they didn’t expect at all. This isn’t the time for you to stress because we’ve got you covered.
Keep reading this guide for tax tips for freelancers and learn how to do freelance taxes.
When Do Freelancers Report Income?
Freelancers that work the occasional side gig get confused as to when they have to report income. The tax code says that if you’re single, under 65, and have gross income under $12,400, you don’t meet federal income tax requirements.
There are different thresholds depending on your age and tax filing status.
This doesn’t apply to freelancers. If you earn $400 or more from freelancing, you have to report freelance income and expenses on Form Schedule C.
If you’re going to owe more than $1,000 in taxes for the year, then you’re required to pay quarterly estimated taxes. You could end up paying penalties and interest if you don’t pay quarterly taxes.
Freelance Taxes to Pay
Freelance taxes work differently than people who work as employees. Both have to pay federal income taxes. The amount depends on your income and tax filing status.
The big difference lies in the taxes for Social Security and Medicare. These taxes are known as FICA or the freelance tax.
Employees have 6.2% and 1.45% of their earnings withheld for Social Security and Medicare, respectively. Employers also contribute 6.2% and 1.45% in payroll taxes.
Freelancers pay both contributions, totaling 15.3% of their earnings. This is based on your net income, so there are ways to maximize your tax savings.
You may have to pay state and local taxes. This depends on your state and municipality.
How to Prepare for the Freelance Tax
Let’s go over how to do freelance taxes. It starts with good record keeping. You need to keep track of all of your freelance income and expenses.
Keep a file with your business invoices and receipts. Use bookkeeping software to make expense management easier.
Come up with a system to set aside funds for taxes every time you get paid. This ensures you always have the funds to pay estimates and annual taxes.
The best way to stay out of trouble is to hire a tax professional. This guide from WealthAbility advisors shows you what to look for in tax professionals.
How to Handle Freelance Taxes
You don’t need to get stressed out about paying a freelance tax. You just learned the basics of freelance taxes. Now you know if you have to file, what taxes you need to pay, and how to plan for tax season.
If you learned a lot from this article, you’ll get even more insights about business and finances from the other articles on this site. Head over to the home page and check them out today!
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