The way many young people work and make a living is changing. It's no secret that the gig economy is replacing traditional long-term jobs for many of today's working youth. In fact, it's expected that freelancers will take over the workforce by the end of the next decade.
There are many benefits to freelance work. You don't have to wake up early, you can be your boss, and your job has more variety and change. But there are certain drawbacks as well. And one of the biggest is how it can complicate one's taxes. Doing taxes as a freelancer can be complicated and stressful.
The new money coming in can be fun until you realize how much you owe when tax time rolls around. We want to help you avoid this fate. Read on and we'll walk you through everything you need to know about taxes for freelancers.
What Taxes Do Freelancers Face?
Freelance workers are not treated like other workers by the IRS. In fact, you might pay a bit more to the government if your main source of income is from freelance work. If you earn more than $400 from freelance work in a given year, you'll need to pay a self-employment tax to the government.
The self-employment tax currently runs at a not-nothing rate of 15.3%. Why do you owe this money? It exists to help cover your Social Security and Medicare. Most people that work full-time jobs already have these taxes taken out of their weekly paychecks. They don't have to think about it. And their employer typically helps to cover some of these costs as well.
The unfortunate truth is that, as a self-employed individual, you are considered both employer and employee. Therefore, the IRS deems you responsible for the full 15.3% rate. This can be a huge blow to what initially seemed like your overflowing freelance coffers. This self-employment tax comes in addition to the normal income tax you're already facing.
That means you'll need to set aside about twenty to thirty percent of your income each year to go toward paying off your taxes. The other downside to freelance life is that no one is watching your tax payments for you. If you don't plan and organize your savings yourself, you could end up coming up short during tax time. And that's the last thing you want to do.
What Are Estimated Taxes?
If you work freelance, you'll most likely want to pay the IRS every quarter. These quarterly payments are known as estimated tax. Not everyone has to pay estimated taxes. The IRS has certain qualifications that you may or may not meet depending on your working circumstances.
If you are likely to owe more than $1,000 in taxes over the year, the IRS recommends that you pay estimated tax quarterly. If you're only freelancing on the side of your main gig, then you probably don't need to worry about estimated payments. Most freelancers make only a few thousand dollars from their freelance work each year.
If you're in the same boat, you can just report this income with your tax return. But if freelancing is your life, you'll likely owe quite a bit more money to the government. As such, you'll probably want to make estimated payments quarterly. You can use the IRS' Form 1040-ES to help figure out how much you might make over the year.
It'll then help you determine how much your estimated tax payments need to be. These payments are called estimates for a reason. If you end up making more then you estimated, you'll still need to pay the remaining taxes when tax season rolls around in the spring.
If you made less than you assumed to, you'll receive a tax refund from the government like many others do during this period. Estimated tax quarters are broken down into four different payment periods with different deadlines. You'll need to have estimated payments in April, June, September, and January.
How to Keep Track of Your Taxes
It can be difficult out here on your own. As a freelancer, no one is looking after you except for yourself. You need to have a good system in place to make sure you're keeping up with your taxes. A big part of this is ensuring you receive a 1099-MISC from any client who has paid you. This 1099 helps to summarize the miscellaneous income you make during a given year.
Clients who pay you less than $600 need not be reported. Sometimes, you may need to request 1099s from clients. Many people pay through digital payment systems these days, such as PayPal. Clients may not be in the habit of providing 1099s. But acquiring these forms can help keep track of the money you've earned.
They can save your neck come tax time. Your clients will also send a copy of this 1099 to the IRS so that the government can expect to see a payment from this exchange. Even if you didn't yet receive certain 1099s, you'll still need to report this info when a tax payment due date is looming.
Understanding Taxes for Freelancers
It can be frustrating to work through the tax process as a self-employed individual. Taxes for freelancers can seem complicated and even unfair. But the benefits of a freelance life make it worth the trouble for many American workers. Need help creating the proper paperwork for your tax documentation? You can create yours securely with our online generator. Try it out today!