Taxes for Freelancers: Amount, How Much to Set Aside, Taxes from Clients

Did you know there were over 59 million people in the US pursuing freelance work by 2020?

A HoneyBook study reveals that an experienced freelancer rakes in more than $70,000 on average annually. With the talk about earnings comes into the picture the matter of tax on freelancing income.

 

If you are not inclined to a 9 to 5 job and want to enjoy the comfort of your couch and flexible work timings, freelancing is the right fit for you. Thus, if you are thinking of leveraging your skills to start a freelancing profession, you must consider the applicability of taxes.

 

When should freelancers worry about tax filing and payment?

 

Handling the compliances related to freelance activities is not as easy as it appears. Regarding the tax on freelancing income, the payment and compliance responsibility lies on your shoulders and sometimes on your employer.

 

Usually, a taxpayer in the US has to file for his/her federal taxes if the income level exceeds the specified thresholds.

US Individual Income Tax Thresholds (For 2020)

Filing Status Taxpayer’s Age Minimum Income Limit
Single Under 65

65 or older

$12,000

$14,050

Married Filing Separately Any age $5
Head of Household Under 65

65 or older

$18,000

$19,600

Married Filing Jointly Under 65 (both spouses)

65 or older (one spouse)

65 or older (both spouses)

$24,800

$26,100

$27,400

Qualifying Widow(er) with Dependent Children Under 65

65 or older

$24,000

$25,300

Self-Employment Any $400

 

It is true that most freelancers think they are out of their tax liabilities. But, if you are earning more than $400 from a single employer then, you are entitled to pay freelancers’ tax. The Internal Revenue Service considers a $400 freelancing income threshold akin to that for a self-employed individual.

In such cases, you are obliged to pay both self-employment tax and the regular income tax as a business owner.

 

As we said earlier, tax on freelancing income is determined either by the freelancer or the employer. When you work under an organization, traditionally, the social security and medical taxes are already deducted from your accounts before receiving your payment. However, as a self-employed person, you need to manage these taxes at your own risk.

What all taxes do freelancers pay?

 

There are numerous forms of taxes on freelancing income that may be applicable in the US.

The common types of taxes a US freelancer might have to pay can include:

 

  • Federal tax
  • State tax
  • Self-employment tax
  • City tax – ( If you reside in a city in the USA)

 

The federal income tax is based on your tax bracket and filing status. On the other hand, self-employment tax is 15.3%, and it represents your social security and medicare taxes.

Do US citizens doing freelance work have to pay taxes?

As a US citizen, you still need to pay US taxes even if you live or work abroad. The fact that your current residence is not on US soil does not exempt you from paying taxes. However, you may enjoy the Foreign Earned Income exclusion provided by the IRS if you satisfy three conditions.

 

  1. You are a US citizen or a foreign resident who resided abroad continuously for at least a year.
  2. You are a citizen of another nation that has a US income tax treaty and has resided in the stated country for at least a year.
  3. You have stayed in an alien country for 330 days in the last 12 months.

 

Reporting your income and taxes as a freelance professional in the US

 

During the course of undertaking your freelance projects, your clients will issue a 1099-MISC form that includes the details of the payments you get for the work. The respective client will submit this form to the IRS. For filing your annual tax return, you need to file Form 1040 that mentions all the earnings info from the 1099-MISC form.

IRS checks the genuineness of both forms by pairing them. If the details do not align, the IRS will issue a CP2000 that states you have unreported income and owe additional taxes.

 

Even if your client does not issue a 1099-MISC form, you are still entitled to file 1040 on your own.

There are other two forms for freelancers’ tax that may apply to you. These are called Schedule SE and Schedule C. You have to submit both these forms along with your Form 1040. Schedule SE is for declaring information about self-employment tax (FICA taxes). While freelancers use Schedule C for reporting their freelancing business income and expenses.

 

How much should you set aside for the payment of freelancer taxes?

Since freelancers need to pay FICA taxes and income taxes, it is advisable to retain 25 percent to 30 percent of your income for meeting the quarterly tax liabilities. Also, make provision for the additional freelancers’ tax you may owe when you file for federal taxes.

At the same time, you might not need to provide for the entire 30 percent of your overall income. It is because you are allowed to adjust deductible business expenses from your freelancing income while calculating the taxes on freelancing income.

 

Deductibles and Benefits Available while Calculating Freelancers Taxes in the US

 You can optimize your tax on freelancing income by adjusting the relevant expenses against your freelancing income. The sole IRS criterion to get deductions for the business expenses is that such expenditures should be ordinary and necessary. The major categories of deductions available are as follows:

 

  • Home office deductions –

Since you work from home, you can apply for a home office deduction if you use an office space exclusively for your freelance work.

 

  • Travel and food deductions –

It may be a bit complicated as a freelancer, but you can still reduce the meal expense with your client by 50% and apply for a travel deduction if the travel is for business purposes. However, you should have concrete evidence to support your claims.

 

  • Education and licensing deductions

Any expenses on education and certified courses related to your business are eligible for deductions from income subject to freelancers’ tax. It is also true for registration, licensing, and certification costs.

 

  • Deductions for tools or equipment

You can claim deductions for tools or equipment you invest in to carry out your freelancing work to estimate tax on freelancing income.

 

What happens if freelancers don’t pay their taxes on time?

 

The IRS is usually kind only to those taxpayers who file their taxes on time. If you missed the opportunity to file and pay your tax obligations, then you are subjected to pay the penalty.  The penalty amount varies as per your case. When you fail to pay the taxes, the sum of penalty is 0.5 percent of unpaid tax obligation for every month or part of the month. At the same time, a failure to file for the taxes can lead to a 5 percent penalty on the unpaid taxes per month. In both cases, the maximum penalty shall be 25 percent of the outstanding tax obligation.

 

Should freelancers collect taxes from their clients?

Freelancers may get payments from the clients with relevant tax deducted from the sources. But, it is not necessarily true, as most often, they are required to deduct and deposit the tax themselves. Even though freelancing may sound simple, you are still responsible for managing the freelancing tax compliances.

 

Should you hire a Freelancer tax consultant?

According to tax experts, a professional freelancer should consider partnering with an expert tax consultant to determine their tax obligations. There are many freelancers’ tax advisories available at an affordable rate in the US. Investing in tax professionals saves you time and headache and enables you to maintain accuracy and avoid penalties.

 

Promptly file and pay your freelancer taxes to ensure seamless operations of your freelancing endeavor!

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