It's tax time! For some, this is easy, as they know their annual income and net profit, and tax season is not a scary time for a regular employee. Freelancers, on the other side, must register as business owners. Therefore, even if self-employed freelancers are eligible for additional tax deductions, they still have to pay self-employment tax, which counts as additional taxes.
By coming to this article, you've already taken the first step to successfully getting your taxes under control. So, follow along with this guide, which is just a guide. It's not in any form of legal tax advice. If by the end of this article, you're still not feeling so great or confident, reach out to a tax professional! Taxes are no joke and shouldn't be taken lightly. Before deciding, read this guide and try to get a bit more of an understanding.
Who qualifies as an independent contractor?
Transitioning from a traditional employee to self-employment is actually a really big leap into the modern business world. According to the US Bureau of Labor Statistics, a 2015 study showed that “15 million people were self-employed . . . 10.1% of all US workers.”
That means that more and more people are becoming self-employed. So, to become an independent contractor, you need to provide a service, form of work, or any other means of receiving money on a contractual basis. You are basically employed contractually, but you still work for, or rather, with someone.
Why is becoming an independent contractor worth paying your own taxes
No matter what position you're working in, you will ALWAYS have tax responsibilities that they must hold up to. While self-employment taxes are not the fun part, there are many perks that come with being a freelancer.
1. Be your own boss
By working on a contract basis, you get to decide who you work with, how much time you spend working, and when that time is. If you are at your most productive at midnight, having a 9-5 job is not going to be very well for that productivity. So, while most people just like to do their job and go home at the end of the tax year, being your own boss also means you need to file tax forms, pay freelance income taxes, pay the full 15.3% for social security and Medicare taxes, AND enjoy the full tax return!
2. Tax deduction
Tax deductions are a huge asset to being a freelancer. Whether you buy a new laptop or rent out an office space, including all business expenses in your tax return is vital to running a successful business and not overpaying taxes.
Never miss a tax deadline with Indy
Indy’s Calendar makes it easy to stay on top of tax season. Add deadlines, schedule meetings, manage your workflow; never miss a beat!
As a freelancer, you get to work on your own time. And not only that, you can work wherever, all you need is a laptop and a stable internet connection. Of course, if the tasks you do allow for that.
Learn the fundamentals of filing taxes as a freelancer
Even if you are a freelancer with highly developed expertise in your field, you might not comprehend the distinction between FICA and IRA.
All business owners must have a fundamental grasp of accounting and taxes in order to make their money work for them, whether they are sole proprietors or well-known CEOs.
Self-employed people often have to pay both income tax and self-employment (SE) tax. SE tax is largely a Social Security and Medicare tax for those who work by themselves. It is comparable to the Social Security and Medicare taxes that are deducted from most wage employees' paychecks. Self-employment tax often solely pertains to Social Security and Medicare taxes.
Being an independent contractor can be amazing but can also be a little more stressful during tax time. It's scary to pay self-employment tax based on your freelance income. Doing and filing taxes as a freelancer can differ from the regular income tax, so if it is your first time doing taxes as a freelancer, and you might be a bit confused with everything you need to do, definitely contact a tax professional.
Freelancers should be aware of the following three tax fundamentals:
According to the Internal Revenue Service (IRS) if your net self-employment income was $400 or more, you must submit an annual tax return. If your net profits from self-employment were less than $400, you must still submit an annual tax return if you fulfill any other filing condition specified on Forms 1040 and 1040-SR.
You must pay a self-employment tax of 15.3% in addition to the standard income taxes based on your tax bracket and filing status. This tax equals your share of the Social Security and Medicare taxes you would typically pay.
If your state or area collects income tax, make sure to include your freelance income on your state return.
Self-employed tax forms
Every customer who pays a freelancer $600 or more will send them a 1099-MISC form instead of the yearly W-2 form you would receive as a regular employee. In your tax return's Schedule C attachment, provide a list of your 1099-MISC income.
Criteria for freelance taxes
Since employers do not withhold freelance income throughout the year, if you own a freelance business and anticipate owing $1,000 or more estimate quarterly taxes, you need to do quarterly payments. You can use IRS Form 1040-ES to estimate your quarterly tax obligations; it's important to come as near to the exact amount as you can with these payments.
If your quarterly tax payments are not paid in full, you must pay the IRS the difference by mid-April (it’s April 18th in 2023), when you file your yearly tax return. You can be required to pay a fine if your quarterly taxes are underpaid excessively. Additionally, you may be required to pay both state taxes and local taxes as a freelancer.
Quarterly estimated taxes | not optional, but essential
Once you're established as an Independent Contractor, you will have understood filing taxes. This taxable income is then divided into four parts (four quarters). These are the estimated taxes of your business income for the following year.
The quarterly taxes are set up to pay estimated taxes over the course of the year, so there isn't one large lump sum of money due when it comes time to pay the income taxes. When the end of a tax year nears, you'll have already saved money sitting in your savings account for tax purposes only.
Tax-deductible conditions for independent contractors
Tax deductions are definitely one of the perks of any business in general. As a freelancer, you can put business expenses as tax deductions! These valuable tax deductions can be so much help in keeping your business strong and financially stable.
Tax deductions reduce your taxable income, which might reduce your tax bill and result in hundreds of dollars in tax savings for you. And you get to claim a ton of them as a freelancer! However, a lot of independent professionals fail to utilize tax reductions. That indicates that some freelancers are overpaying their taxes.
Among the most typical deductions for freelancers are:
- Marketing and advertising
- Office equipment
- Equipment and software for computers
- Travel and business meals
- Home office
Let's see how independent contractors can claim deductions.
Home office deduction
The home-office deduction may be available to you if you operate from home as a freelancer. This enables you to deduct expenses ranging from electricity and rent for the area of your home that you use as your main office. However, you are only permitted to utilize the space for work-related activities. When the kids are in school, a family room that also serves as your workstation does not qualify for this deduction. If you're debating whether to set up an office at home or rent a location outside, keep in mind that home offices have some tax advantages.
Another frequent tax write-off for independent contractors is auto expenditures. Maintaining thorough records of your costs will allow you to compare the normal mileage rate and real car expenses and determine which one provides you with tax benefits.
Cost of health insurance
Self-employed business owners can count insurance premiums as a business expenditure and deduct the cost from their income while most workers are not permitted to deduct medical expenses, including insurance premiums. But there are some restrictions. As long as your spouse doesn't have an employer-sponsored health plan you are entitled to enroll in, health and dental insurance can be written off.
You may also be able to deduct payments for web hosting, advertising, marketing, office supplies, computer hardware, software, and education and certification charges.
Popular tax deductions to claim on your tax return
While you still need to pay taxes, your tax bill does not have to be through the roof. There are some write-offs so that your freelance taxes do not cripple you and your small businesses.
- Standard Deduction
- IRA contributions deduction
- Health savings account (HSA) deduction
- State and local taxes deduction
- Medical expenses deduction
- Student loan interest deduction
- Mortgage interest deduction
- Charitable contributions tax deduction
- Educators expense deduction
Don't be afraid of online tools!
Online tools are there to make our lives easier. So, I say, let's use them! With tools, you can stay on top of your business expenses, set up reminders, calculate how much you owe, and even file taxes.
Paying taxes is a timed event that does not have an extendable deadline. The best way to pay taxes on time is to stick with those estimated tax payments throughout the year. While tax season may get pretty hectic, and you feel like you need to call all the tax professionals in the area, you can make things easier by using Indy's Calendar tool. It'll help remind you of all incoming tax deadlines.
You can also use an online tool to input self-employment income as well as wages, and it measures the self-employment tax, estimated tax, and the self-employment tax deduction, to provide an overall tax liability estimate. Additionally, you'll learn if you're eligible for any tax benefits, and it can help in saving money as a business owner.
How much should I expect to pay in taxes?
Honestly, the tax system is pretty straightforward. As confusing and irritating as it can become for outside expenses, paying personal income tax rarely varies much. A general rule of thumb is that 25-30% of everything you make should be kept for tax purposes.
There are a variety of ways to keep track of this (and plenty of online calculators or programs to help), but just taking out that 25-30% of each payment/paycheck could be the simplest and least expensive way to do it. It's sometimes beneficial to have a bank account set up strictly for funds that will eventually pay income taxes or self-employment taxes. This is especially important for the first year before quarterly estimated tax payments are established.
Is it possible to lower my taxes or get a tax refund?
Lowering taxes is definitely possible, but it also takes research and effort. In many cases, just keeping track of all of your deductions will help you save a lot of money on your taxes. But there are also a variety of different options out there. The most promised way to keep your taxes low and simple is to be prepared. Take the proper amount out, don't miss the deadlines, and do what the IRS wants and expects of you.
Getting a tax refund as an Independent Contractor should be expected. Unfortunately, that's one downside, but on occasion, if you pay estimated taxes quarterly, but your estimation was off, you could end up with money left over. This fund can either be used as a tax refund or rolled over into funding for the following year's quarterly estimated tax payments.
In conclusion, filing taxes as an Independent Contractor isn't always easy, but it is no doubt vital and totally required by the government. Whether you decide to file them yourself or hire someone to do it for you, it's important to know and understand what paying taxes means and the basic process.
If you've come to this article, you've already taken the first step toward being a responsible, tax-paying, Independent Contractor. That is the first and most important step. Take a minute to take all the information from this article and prepare to pay taxes as an Independent Contractor. Take precautions, stay prepared, and never miss a deadline. Both your income and peace of mind will thank you.