FREELANCE TAX: What Is It, How to Calculate It & Rates

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Being a freelancer means being your own boss, which is great. Go out every day, kill something, and drag it home. And you are not alone. In fact, freelancers are expected to make up the bulk of the U.S. workforce within the next decade. Why not? As a freelancer, you choose your hours, the projects you want to work on, and where you work. You are in charge! But even if you already have a full-time job, freelance work is a great way to make extra money. Let’s be honest, who wouldn’t want more money in their pocket? But here’s the real story! Whether you are a full-time freelancer or just a part-time worker affects how you pay your taxes. And if you’re not careful, huge tax bills can cost you most of your freelance income. 

Freelance Tax 

According to the IRS, if you plan to pay at least $1,000 in taxes this year, you must pay your taxes quarterly. 3 Taxes on freelance income are not withheld throughout the year, so you will likely need to estimate taxes. Every quarter for the next year she will pay the IRS. So how do we know if we need to do this? Great question. If you’re making less than a few thousand dollars a year as a freelancer, you may want to skip the estimated tax and simply list your freelance income when you file your tax return. 

However, if you believe you will have to pay more than $1,000 in taxes, you can use form 1040-ES to calculate your annual income and calculate estimated taxes that determine the basis of your forecast. If you have underpaid your estimated taxes, you will have to pay the rest of the tax when you file your annual tax return, as it is ultimately an estimate. On the other hand, if you overpay the estimated tax, the excess will be refunded. 

US taxes are pay-as-you-go. If you’re making money, even through a side job, the IRS wants to get your cut as soon as possible. For this reason, employers withhold taxes from their employee’s salaries. However, because you are not an employee, you may have to pay estimated taxes during the year.

Important forms involved: Form 1040-ES, and W-4

Quarterly, it may be required to pay the IRS for an estimate of the tax due. (Here’s how it works.) Waiting until the tax deadline to do it all at once can result in fines and interest. Having a partner who works regularly and submits paperwork with you may help you avoid quarterly hassles. 

Calculate Freelance Tax

Freelance tax is a federal tax levied on income earned while self-employed. It consists of two types of taxes. Social Security and Medicare taxes. The Federal Insurance Contributions Act of 1935 guarantees that both employers and employees make regular contributions to Social Security and Medicare funds. For the tax year 2022, the Social Security tax rate was 12.4%, the Medicare tax was 2.9%, and the total tax rate was equal to 15.3%. Collectively these taxes are called FICA taxes. 

To calculate your freelance tax, multiply your self-employed net income (income minus deductible expenses) by 0.9235 (92.35%). Then multiply that figure by the FICA tax rate (15.3% in 2022) to get your estimated self-employment tax. Why 92.35%? Note that as an employee, the employer bears half of his FICA tax burden (7.65%). Employers can write off these payroll tax payments as a deduction from their taxes, and the IRS wants to give the self-employed a similar deduction. Because many taxpayers report self-employed income on their personal tax returns, the IRS automatically applies this 7.65% exemption to self-employed net income before determining the tax amount. 

Freelance Tax Deductions

Whether you’re new to freelancing or have been self-employed for years, there are some tax deductions you should be aware of. There are only expenses that you can claim as a freelancer and expenses that are not deductible. There are also tax credits that can affect your year-end tax return. Therefore, it is important to understand which business expenses you can claim on your tax return as a self-employed person. Here are some tax deductions and incentives for the self-employed. 

#1. Credit Card Interest

Due to the nature of your business, you may be able to deduct credit card interest when filing your Form 1040 federal tax return. If you’re still not sure whether credit card purchases are business-related, ask yourself if it’s normal and necessary to run your business. If applicable, the IRS will certify it as a corporate purchase. This includes but is not limited to mobile phones, meals, salaries, wages, and incidentals. 

#2. Health Insurance Premiums

Health insurance and other benefits are usually one of the biggest perks of working for a big company. However, health insurance premiums can be expensive for the self-employed. However, you may be able to deduct certain things from your taxes. Health insurance premiums paid for yourself, your spouse, dependents, and children under the age of 27 are deductible. 

#3. Deductible Taxes

The most important thing to remember when deducting taxes is that they must be claimed in the year in which they are paid. That means it’s important to make sure your payments and taxable income calculations are correct. If you need help putting it all together, you can consult a tax advisor. However, if you are self-employed or run a small business, there are some deductions you can take. This may include payroll taxes paid out of your own funds and property taxes imposed by local or state governments. A complete breakdown of deductible taxes is available on the IRS website. 

Freelance Tax Rate 

The self-employed tax rate is 15.3%. The tariff consists of two parts. 12.4% for Social Security (retirement, survivors, disability insurance) and 2.9% for Medicare (hospital insurance). In 2021, the first $142,800 of total salary, tips, and net income will be subject to any combination of self-employment tax, social security tax, or social security portion of railroad pension tax. By 2022, that amount increased to $147,000. 

Add a 2.9% Medicare portion of your self-employment tax, social security tax, or railroad pension tax (Tier 1) to all your combined salary, tips, and net income for the year. If your wages and tips are subject to Social Security tax and/or the Tier 1 portion of Railroad Retirement Tax, totaling $142,800 or more, you don’t have to pay the 12.4% Social Security portion of the SE tax online. income. However, you must pay the Medicare portion of the 2.9% freelance tax on your gross net income. An additional Medicare tax rate of 0.9% applies to wages, compensation, and self-employed income above the tax year threshold. 

Freelance Tax Write-Offs

If you are earning income without withholding tax, you are responsible for estimating and paying taxes. Underestimating the amount you owe over the course of the year can result in a huge tax bill at tax time. However, even in such cases, freelancers have various tax exemptions that can reduce their tax burden. 

#1. Office and Work Supplies

Expenses for consumables and equipment such as laptops, printers, books, and other items may also be deductible. You can deduct the cost of equipment all at once, or you can depreciate larger assets such as computers and charge their costs over time. 

#2. Educational Expenses

Courses and other educational expenses related to business are deductible. Travel expenses may also be deductible if you travel to attend a course or conference. However, you must be able to demonstrate that the training helps you maintain or improve your skills. 

#3. Retirement Contributions

Contributing to a traditional IRA, SEP IRA, or SIMPLE IRA can give you tax deductions and savings for years to come. Note, however, that the exact amount you can deduct depends on how much you earn and whether you or your spouse participate in a work-related pension plan. 

How Much Should I Set Aside for Taxes as a Freelancer? 

To account for both self-employment taxes and the taxes you should pay on your income, it is advised to set aside at least 30% of your income for taxes when you first become a full-time freelancer. Otherwise, you can use last year’s income to calculate your estimated debt for this year. 

Is Freelance Better Than a Salary?

Freelancers are more likely to earn more than employees because they can get recurring work from clients or work under deductible contracts. Analyzing the data by industry, it is found that SAP and consulting freelancers, in particular, generally earn more ($110 and $128 an hour, respectively). 

How Do I Prepare Freelance Taxes? 

The following tax best practices for freelancers will ensure compliance with the rules and avoid tax audits.

  • Understand freelance tax basics.
  • Get to know the company structure. 
  • Understand how to estimate quarterly taxes.
  • Think daily, not quarterly.
  • Declare all business income.
  • Get ready for tax day. 

How Do I Calculate Self-employment Tax?

How self-employment tax is calculated as follows:

  • Determine the tax base for self-employment. Multiply the net income by 92.35% (0.9235) to get the tax base. $50,000 x 92.35% = $46,175.
  • Calculate self-employment tax. Multiply the tax base by the self-employed tax rate.$46,175 x 15.3% (0.153) = $7,064.78.

Why Are Freelance Taxes So High?

As a freelancer, you are both an employer and an employee. This effectively doubles the FICA tax rate to 2 * (6.2% + 1.45%) = 15.3%. This is one of the main reasons freelancers tend to pay higher taxes than their employees. 

What Is the Difference Between Self-employed and Freelancers? 

Freelancers usually work alone and work on solo projects. A self-employed person, on the other hand, may have an entire team of employees to assist them in their scope of work. 

How Do Freelancers Get Paid?

Freelancers can accept credit cards for payment, and clients may prefer to pay in plastic. These payments are often processed through PayPal or another online payment system. You can also purchase your own credit card processing equipment to accept payments from your customers. 

Final Thought

For freelancers, dealing with taxes is inevitable. As a freelancer, he must report to the IRS if he earns more than $400. Fortunately, the IRS treats your freelance career as a business. In other words, you can deduct your expenses from your income. To avoid costly mistakes, it’s a good idea to consult a tax professional when preparing your books and filing your first year’s tax returns. 

  1. What Is a Freelancer, And How Do You Become One?
  2. FREELANCE WORK: What Are Online Jobs, Resumes, Student and From Home
  3. FREELANCE MARKETING: Meaning, what to Do & Salary
  4. SELF-EMPLOYED DEDUCTIONS: Meaning, How it Works & Guide


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