Freelancing is a great way to make money and have more control over your schedule. But do freelancers have to pay taxes?
In this blog post, we’ll take a look at the rules for freelancers on tax filing and payment requirements.
What is a Freelancer?
To begin, we should first define what a freelancer is.
A freelancer is a person who does work on a contract basis, at an hourly rate, or by the project.
This might be in contrast to someone with a traditional full-time job working 40 hours every week and receiving benefits like insurance.
Freelancers can also come from any industry – tech, design, writing, business management – you name it.
Some examples of freelance positions are:
- Website Designer
- Graphic Designer
- Marketing Consultant
This is just a shortlist, as there are many more positions that can be considered freelancing.
Freelancers might work for themselves, or they may even work with an agency to get projects.
Either way, if your full-time gig is freelancing or if you do freelance work on the side of your regular job, you are considered a freelancer.
Taxes for Freelancers: What Does the Law Say?
Do Freelancers Have to Pay Taxes?
Freelancers have to pay taxes just like any other worker.
Freelancers must file tax documents and pay federal, state, and local income taxes (where applicable).
They can make estimated quarterly payments for the self-employment tax due on April 15th of every year.
If a freelancer does not make estimated quarterly payments, they will owe more when the end of the year comes around.
How Do Freelance Taxes Differ From Employee Taxes?
In general, freelancers are usually responsible for paying quarterly taxes.
This isn’t the case with employees who have their taxes withheld automatically by their employer each paycheck.
One of the most significant differences between an employee and a freelancer is that when you’re working as a freelancer, you’re generally required to estimate what you owe in taxes quarterly and pay that amount when you file your annual income tax return.
An employee does not have to do this.
What Tax Rate Do Freelancers Have to Pay?
Freelancers are taxed at the self-employment rate of 15.3%.
The self-employment tax is made up of Social Security and Medicare.
Freelancers are also entitled to write off business expenses, such as the internet costs, for work.
But this does not include personal expenses like your gym membership that do not have to do with work.
How to Calculate How Much You Owe in Taxes as a Freelancer
You can use the self-employment tax calculator from TurboTax, which does not require any information about your business.
It does take into account any deductions you may have made on that year’s taxes.
This is a great way to calculate how much money you owe in taxes as a freelancer, and it will help you plan accordingly, so you don’t owe more than expected at the end of the year.
What Are Some Items Freelancers Can Deduct?
Freelancers can deduct mileage, which is the distance they have driven for work.
This does not include your commute to and from work, but rather any driving you did during a day’s worth of working hours to get around town.
Another item freelancers can deduct would be travel expenses related to their work, such as plane tickets and hotel costs.
Freelancers can also deduct their home office space if they work from a desk at home.
This does not include any other personal expenses that do not have to do with the freelancer’s business.
How Much Should Freelancers Save for Taxes?
It is recommended that freelancers save up to 20% of their earnings for taxes.
This does not include any other deductions that the freelancer may make, such as retirement accounts or medical insurance.
The more they save now and throughout the year, the less likely they will owe at tax time in April when it is due.
Why Do Freelancers Have to Pay Taxes?
Freelancers have to pay taxes because the law requires it.
It does not matter if you’re a freelancer for yourself or working with an agency – as long as you are making money, you need to file and pay your taxes accordingly.
Even though it may not seem fair, freelancers are still required to pay taxes the same way as people with traditional full-time jobs.
This is so that everyone has a fair chance at success in their careers.
You may think that because freelancers do not get healthcare or other benefits, they would be exempt from paying these taxes, but this is not the case.
How to Avoid Getting Audited by the IRS
Don’t Make Any Mistakes on Your Tax Return
Freelancers who have been audited by the IRS know that it does not take much to get audited.
That’s why it is essential that freelancers are meticulous about every detail when filing their taxes for the year and do not miss anything – no matter how small or insignificant.
The last thing you want is to be on the receiving end of an IRS audit.
So if you’re a freelancer who has never filed taxes before, make sure to file carefully and avoid any mistakes as much as possible when filling out your tax return.
Make Sure You Have Proper Documentation for Deductions
Freelancers who are itemizing deductions for the year need to ensure they have all of their necessary documentation in order.
This includes receipts of the items they are claiming so it doesn’t look like they are trying to make things up.
If you don’t have a receipt or other documentation for an itemized deduction on your tax return, then leave it blank and do not try to estimate its value.
If you do end up getting audited by the IRS and are unable to furnish receipts for the items you deducted, this can look like you’re trying to defraud the government, and this does not go over well.
In other words: make sure your documentation is in order before filing taxes for the year!
Report All Income: Including Cash
Freelancers should report all of their income, including any cash earnings from side jobs.
If you charge a client for your service and they pay in cash, then this is income.
It does not matter if you’re a freelancer for yourself or working with an agency – as long as you are making money, this is considered income and should be reported.
The Bottom Line
Freelancers have to pay taxes because they are working and earning an income, just like any other worker.
It does not matter if you’re a freelancer for yourself or working with an agency. As long as you are making money, you are responsible for filing and paying federal, state, and local income taxes (where applicable).
If this sounds complicated, don’t worry!
The most important thing you can do as a freelancer is make sure your documentation and tax filings are in order – that way, when April 15th rolls around every year, you’re ready with all the necessary paperwork.