So, maybe you’re getting a little tired of working for someone else, or you want to earn some extra income. You’re not alone.
More than 68 million Americans list themselves as freelancers. That number may grow to 90 million by 2028, according to a recent Upwork poll.
But there are some things to consider before you make the jump, especially in terms of taxes. So, it’s essential to learn as much as possible before striking out on your own.
Here’s a primer to get you started.
What to report and when to report it
The IRS rules on reporting income are pretty straightforward. If you earn more than $400 from a single employer as a freelancer, it must be reported on your annual tax return. Any employer who pays you $600 or more should issue you a 1099-MISC form.
Even if they don’t, you are still responsible for reporting the income. Most freelancers typically file as sole proprietors and file a Schedule C form that integrates with their personal tax return.
If you expect to owe $1,000 or more in taxes, you should pay estimated taxes quarterly. Try to be as accurate as possible with these estimates. If you underpay, you’ll owe the IRS the remaining balance when you file your annual taxes on April 15.
As a freelancer, you must pay standard income taxes based on your tax bracket and filing status. That isn’t any different from an employee working for a company. The big difference is the additional 15.3% you’ll pay in self-employment tax.
As a traditional employee, your employer typically pays a portion of these taxes for Social Security and Medicare. However, as a freelancer, you are responsible for the entire amount. That can add up to a significant part of your total income. So, many financial advisors suggest putting aside 30% to be ready at tax time.
Reducing your tax bill
There are ways to reduce your tax burden as a freelancer. One of the most common methods is the home-office deduction. If you have a space in your home that is used exclusively as your primary office, utilities and rent for the space used might be deductible.
Other standard deductions include vehicle expenses, health insurance, office supplies, hardware and software, and professional services.
But it’s important to realize not everything is a deductible. It is dependent on the type of business you run. The IRS will look at the relevance of your deduction and decide, so be judicious in your decisions.
All this can get a little confusing as you set out, so consulting with an accountant or CPA is probably your best bet. Tax laws can be complex, and they change regularly. Having professional help will avoid surprise tax bills that can hurt your fledgling business.
Putting it all together
Being a freelancer can bring newfound freedom and a sense of control over your destiny. But, as we mentioned earlier, it brings challenges traditional employees don’t have to face. So keep learning all you can so you can and avoid surprises at tax time.