Since 2020, many people, their job schedules have changed and become more flexible. The remote workforce has increased tremendously allowing individuals to take their future into their own hands and become self-employed.
Working for yourself gives individuals the opportunity to work the jobs they want or become their own boss by creating their own small business.
You can make your own hours and dictate your own workflow. If you intend on becoming self-employed, you’ll need to have knowledge of the taxes that will follow.
Being a freelancer means you will be in charge of your own taxes and keep track of how you run your business. Here’s what new and current freelancers should be aware of.
If you are looking to be self-employed, whether it’s a freelancer for a company or running your own small business, you need to understand how taxes work. To pay taxes as a freelancer you must make at least $400 a month.
If you are working for a company and getting paid more than $600 a week, your employer will have you fill out a 1099-MISC form. As a freelancer, you have to set aside money from each of your checks to cover your income tax, as well as the self-employment tax. This specific tax is a requirement for all freelancers and small business owners.
The self-employment tax rate for 2023 is 15.3%. This tax covers your Social Security and your contribution to Medicare. In most traditional jobs this tax is taken out of your paycheck automatically. As a freelancer, you need to keep track of your income and how much you should be putting away to cover your own taxes.
It’s suggested that you should set aside 25-30% of your income to cover both your income tax and self-employment tax.
When Should You Pay Your Taxes?
Freelancers should make a habit of filing their taxes quarterly. Failure to do so can lead you to pay more taxes at the end of the year and gain penalties and late fees. The dates for filing your quarterly taxes are January 15, April 15, June 15, and December 15.
Make sure you have these dates marked in your calendar. You can use these as your deadlines to get your documents and finances together with plenty of time to give them to your tax professional. If you need help determining what to save, try using this method to gain a better understanding of how to put away funds for your taxes later on.
Which Deductions Am I Eligible For?
How you are taxed as a freelancer depends on the type of business you have. However, to receive a deduction your business needs to meet a set of requirements. Here are the common deductions you can take as a freelancer.
If you started a small business during the year you are filing taxes you can deduct any expenses that are related to your business. These expenses include research and development, equipment purchases, and costs for marketing your business. You can even deduct the cost of fees for lawyers or accountants.
If you’re looking to have a home deduction, you have to meet two requirements. A part of your home has to be used exclusively for the business as well as where you conduct most of your business. When you meet these requirements, calculate the percentage of your home’s square footage that covers the space of your business.
You will also factor in your mortgage or rent payment and that percentage becomes your deductible. If you are a homeowner looking to build a room strictly for your business, you can always look into what the cost of refinancing your home will be. Home refinancing can be a great way to free up cash over time to afford to make improvements to your home as your business grows.
Self-Employment Health Insurance Tax Deduction
Finding the best healthcare option for a freelancer can be difficult as there are many options available. They have premium healthcare and even those that cover low-income self-employers. If you are paying for premium medical and dental insurance coverage for yourself, your spouse, and your dependents, you might be qualified for a self-employment health insurance deduction.
The policy covers all children, even if the child isn’t a dependent. Your medical expenses will be viewed as an itemized deduction if you don’t claim 100% of your paid premiums.
Transportation is another common deductible for most freelancers. If you are traveling to and from work, meeting clients, or buying supplies for your business, you will be able to factor that into paying less money during tax season.
For example, if you are using your personal vehicle for business needs, keep track of the receipts for anything related to your car for business use.
That includes maintenance, repairs, mileage, and fuel. Make sure you’re up to date with the standard mileage rate allowed, as the IRS makes changes to the rate annually. In 2021, the mileage rate was set to 56 cents per mile.
Your travel deductible covers train and plane fares, car rentals or hotel stays if it’s associated with your business. Make sure to keep a log of your receipts for this in order to be able to use them for tax time. These days most purchases are made by card. You can leverage your debit or credit card to easily keep a file of your receipts and print them out during tax season.
If you are someone who donates to charity, it’s good news that your contributions won’t be overlooked. Donating to charity as a freelancer can get you a deduction on your personal tax return. Before you can get a deduction, the IRS has to approve the organization you are donating to. If you need to know what type of charities you can donate to, the IRS provides types of charities that are deductible.
If you’re looking to donate to a charity just to get a deduction, this option might not be for you. The money you donate is going to help whichever organization you’re supporting. There are over a dozen charitable organizations you can donate to. Just determine what cause is most important to you.
Unlike traditional jobs, you’ll have to pay for your own resources in order to keep learning and growing. Work-related education like books, tuition, and supplies can be deducted if you work as a freelancer. This deduction will reduce the amount of your income and self-employment tax.
When you are starting a business from the beginning there’s a chance you might be looking to take a loan. The interest you pay on the loan can be deducted as a business expense. The Interest on the loan you took out can be considered a business expense as well.
If you are going to be self-employed, understand that it comes with a lot of responsibility. You won’t have the luxury of having your income taxed for you and you need to make sure you are keeping track of everything.
Once you have the tax knowledge down, you’ll be able to run your business and accounting information seamlessly.
Whether you’re freelancing for a business or running your own business, understanding your tax laws will go a long way toward your individual success.