Whether you want to make some extra money on the side or like the idea of being your own boss, freelancing can be a great option.
Once you get started freelancing, the excitement you feel when that first paycheck hits your bank account is contagious! Unlike a standard paycheck from an employer that calculates out the taxes you owe, though, your freelance check does not. This can make filing your taxes a bit more complicated.
As a freelancer, the Internal Revenue Service views you as a self-employed individual. This means that you are responsible for covering both your income tax, as well as self-employment tax. Without proper preparation throughout the year, you may find yourself with a hefty tax bill and no funds to cover it — which is why it’s imperative you set aside enough money throughout the year to cover your payments.
If you’re new to freelancing, this can seem very overwhelming. How much should you be setting aside to cover your taxes?
Do you pay it all when filing your taxes, or should you pay it throughout the year?
AA Tax & Accounting Services, LLC has compiled a guide for freelancing taxes to make the process less daunting.
How to calculate tax payments for freelancers
As a freelancer, you are required to pay income tax and self-employment tax. Self-employment tax refers to the taxes that a typical employer would withhold from your paycheck on your behalf, covering Medicare and Social Security taxes. In this scenario, your employer would pay half, and the other would be withheld from your paycheck — but that isn’t the case when you’re self-employed.
Since freelancers are considered the employee and the employer, you are responsible for covering all tax payments based on your income. Self-employment tax is 15.3% of the first $142,800 of income you receive, plus 2.9% of anything you earn over this threshold.
If you don’t have a budget for the taxes you’ll owe when filing your tax return, you may find yourself with a high tax bill. Instead, you should set aside 25% to 30% of your income to cover these costs. The easiest way to do this is to estimate how much you should deduct from your income each month and make estimated quarterly tax payments.
To get an estimate on how much you will owe to the IRS, you can use IRS Form 1040-ES to calculate your estimated tax payments.
Factor business expenses into taxable income
Although you will likely owe 25% to 30% of your income to the Internal Revenue Service for taxes, you may be able to deduct costs associated with running your freelance business. Using a Schedule C form, you will be able to subtract qualifying business expenses from your freelance income, calculating your taxable income for the year.
To ensure you get the most out of your business expense deductions, keep records of the following expenses:
- Office supplies
- Travel expenses
- Mileage driven for business purposes
- Maintaining a home office
Once you’ve calculated your taxable income from freelancing, you can determine how much you should be set aside for quarterly tax payments, so you don’t have a significant tax bill.
Do I need to make estimated tax payments?
When freelancing, the IRS expects you to pay your taxes at regular intervals throughout the year. Although you won’t know the exact amount you will owe, you can use the form mentioned above to calculate your estimated quarterly payments. If you expect to owe more than $1,000 in taxes come tax season, you are required to submit estimated payments quarterly by the following deadlines:
- April 15 of the current year
- June 15 of the current year
- September 15 of the current year
- January 15 of the following year
Not paying estimated quarterly taxes may result in tax penalties, causing you to owe the IRS more than you accounted for. Budgeting for income tax and self-employment tax will provide you with peace of mind knowing that you’re prepared for tax season and won’t be hit with an expensive tax bill — you may even get a refund!
Tax consulting services in Cedar City, Utah
If you’re self-employed, we recommend consulting certified public accountants like AA Tax & Accounting Services to better understand what you will owe come tax season and how much you should be paying to the IRS quarterly.
The AA Tax & Accounting Services team can help you execute the right self-employment tax strategies for peace of mind. Contact us to schedule an appointment.