If you are a freelance, one of the most confusing topics is taxes. When you had a job for an employer, they took out taxes so you didn’t really have to think about it.
Now that you’re self-employed, there’s no one withholding those funds. Plus, you have to pay the notorious self-employment tax. Some say that it’s the price of doing business, but it can leave you in financial trouble if you don’t plan for it properly.
You need to find a reliable freelance taxes calculator to help you figure it all out. Don’t worry because everything you need to learn about freelance taxes is covered in this article.
Read on to find out about calculating freelance taxes and take the stress out of managing taxes.
What Are Self-Employment Taxes?
If you earn more than $400 as an independent contractor, you need to pay self-employment taxes. This is the case for just about all freelancers.
You should think about taxes for freelancers in two categories. The first is your income tax. This is a percentage of your adjusted gross income that you pay in federal taxes.
Income tax amounts are based on tax brackets. The U.S. has a progressive tax system, meaning the more money you earn in the year, the more you’ll pay in taxes.
Again, that’s based on your adjusted gross income, which is your income minus tax deductions and credits.
The second category is the self-employment tax. As an employee, you might remember a line item on your pay stubs that said FICA or SSDI.
This amounts to 6.2% of your gross income for social security and 1.45% for Medicare. Your employer would then match those amounts in payroll taxes.
Since you don’t have an employer withhold and match those funds, you have to make the total social security and Medicare contributions yourself.
That amounts to 15.3% of your net income. Your net income is the gross income minus your business expenses.
The Best Freelance Taxes Calculator
Most tax software and online bookkeeping companies have freelance tax calculators. They don’t take a few things into account.
They expect you to already know or estimate your net income. They’ll then calculate your self-employment taxes for you.
You have to track your income and expenses carefully. That gives you your net profit, which is used to calculate your freelance taxes.
The best way to do that is to create a profit and loss statement each month. Create a spreadsheet that lets you enter your expense information according to category.
This is the best way to measure the financial success of your business and make tax time a lot easier.
What qualifies as a business expense? Anything related to your business. Advertising, supplies, training, certifications, rent, utilities, and website hosting are just a few examples of business expenses.
Don’t forget about the home office deduction if you work from home. This is a deduction that you can take if you have space in your home that’s used only for business purposes.
Self-Employment Tax Deductions
Paying self-employment taxes seems like a punishment when you see corporations paying nothing in federal taxes each year.
There are a couple of ways you can work the tax code in your favor beyond the standard business deductions.
The first is that half of your self-employment tax is deductible. When you calculate your business income and expenses, they’re listed on Form Schedule C.
Form 1040 is for your personal income return and you can deduct 50% of self-employment taxes there.
There’s also a pass-through deduction of up to 20% of your business income.
One of the reasons why freelance taxes are so confusing to people is that you need to pay taxes every quarter in estimated taxes.
The IRS requires you to make quarterly tax payments if you owe more than $1000 in taxes. That’s to prevent a large tax bill in April that takes you by surprise.
In your first year as a freelancer, you can use your net income as a guide and pay 15.3% in April, June, September, and January.
If you’re a veteran freelancer, then you can use your previous year’s tax return as a guide. Take the total amount of taxes owed for the year and divide it by four.
You’ll need to adjust your estimated taxes if you make more or less than you did in the previous year.
You should set up a savings account just for taxes. Anytime a client pays an invoice, you should set aside a percentage (at least 15.3%) in that bank account. You should set aside your federal income and state taxes as well.
That prevents you from spending that money and falling behind on your taxes.
Growing Your Freelance Business
Once you have systems in place to manage your money and taxes, you can scale your freelance business up.
You can invest more time and effort into marketing. The best combination is a mix of social media and personal networking.
That gives you a chance to get business from your personal networks and broaden your reach to capture new clients.
Check out this guide for more freelancing tips.
Get a Handle on Freelance Taxes
You don’t need to be intimidated by freelance taxes anymore. You do need to plan for them, and you can do so by using a freelance taxes calculator.
You do need to track your net income and take the proper business expenses. You’ll then pay 15.3% of your net income in self-employed taxes. Make sure you pay the right amount in estimated taxes, so you don’t owe the IRS money during tax season.
For more business and financial insights, be sure to read the latest articles here.