NOTE: We aren’t tax professionals and can’t offer tax advice.
Being your own boss provides several upsides—but um, simple tax filing is not one of them.
Though it can be an incredibly complex topic, you’ll be more at ease knowing you won’t have to worry over receiving a notification in the mail about a fine.
Since you use Freework—the perfect place that centralizes all your needs as a freelancer—all your invoices and tax documents can be easily sent over to a tax consultant or accessed if you’re filing your own taxes.
If you’re starting out as a freelancer, inform yourself how taxes work. If you’re a citizen or resident of the U.S., this article will be especially useful.
Table of Contents
- The 3 Taxation Models
- Are you considered a freelancer by the tax authorities?
- What’s the difference between a freelancer and being self-employed/contractor?
- How do I keep myself organized for tax season?
- What’s an EIN and do I need one?
- If the W-2 tax form is for the employed, what’s the self-employed equivalent?
- How to calculate the amount to put aside?
The 3 Taxation Models
Most nations make their constituents submit to one of three fundamental taxation categories:
- Income tax
- Company tax
- Capital gains tax
Income tax applies to all non-incorporated entities that receive payment, even cryptocurrencies as income.
Company tax applies to enterprise-grade operations that are large and deal, accordingly.
Capital gains tax applies to those who speculatively with the express purpose of making gains. Most nations split capital gains taxes into short-term gains and long-term gains categories depending on various criteria.
These taxation models give you a snapshot of what tax authorities are looking for when they’re asking you to file self-employed taxes.
Are you considered a freelancer by the tax authorities?
If you’re working for yourself, you are considered self-employed. Freelancer is a term not often used by the tax office. Typically, they refer to those who make their living as self-employed or independent contractors.
What's the difference between a freelancer and being self-employed/contractor?
Though “freelancer” is a term used broadly, often for those how are self employed. Though tax authorities tend to view freelancers as though who have a 9-5 job and have some sort of side hustle, like printing graphic shirts or making and selling home-made deodorant (yes, there’s a market for it). Freelancers are an example of a self-employed person.
A contractor dedicates their time working for one business or entity, under a non-employee set of agreement. If you dedicate nearly all your work time marketing the home-made deodorant that someone else is making, you’re a contractor. A contractor is definitely another example of a self-employed person.
Self-employed is the favored tax term. The forms you file reveal what kind of self-employed person you are.
How do I keep myself organized for tax season?
Keep a ledger of what’s going in and out of your business account. Take a look at Quickenbooks to keep accounting simple and smooth. It’s important to keep all invoices and business expenses in one central place, so you easily access it when tax season rolls around. Accounting may be a tedious process, but it can save you serious headaches.
To ease the process, follow these basic freelancer accounting techniques:
- Do not mix your personal and business accounts. Have clients transfer money into your business account, never your personal account.
- If you purchase services or products, always keep the receipt. Take photos of the receipt and save them in a digital folder. Or be old school and tuck them into a folder.
- Use the “memo” line when writing a check or the comment box when making an online transfer. This will help your accountant track where amounts of money were not only sent to, but why they were being sent.
- If you do pay cash for an item, be sure to ask for the receipt. It’s nearly impossible to prove you payed for something when the exchange was done in cash.
What's an EIN and do I need one?
The EIN is a 9 digit number given by the IRS. It stands for Employer Identification Number and helps freelancers distinguish whether they have a taxable entity or not.
A freelancer does not have to acquire a EIN to freelance; a freelancer simply needs their Social Security Number to begin. A EIN is helpful though if you live off the income as a freelancer. It helps separate your personal activities from your professional ones. It can help you as you set up a business account and again, separates your personal taxes from business taxes on documents and forms.
If the W-2 tax form is for the employed, what’s the self-employed equivalent?
The W-2 form is the document given to employees by their employers, showing how much money they earned in the past year. For the self-employed, the 1099 is the tax form used to report earnings. Why the difference? As an employee, Medicare, Social Security, and state taxes are automatically withdrawn from your paycheck. When you’re self-employed, you have to put aside money that would go pay these taxes. If you work a 9-5 job, be sure to add a Schedule C form to your tax forms. File a Schedule C or Schedule C-EZ which show your earnings and expenses.
Self-employment tax is 15.3% (12.4% for Social Security and 2.9% for Medicare taxes) of the first $118,500 of your self-employed income. As self-employed, you pay and file taxes on a quarterly basis, around January, April, August, December. It’s a pay-as-you-go system. When money rolls into your bank account, then you hold the money in your business account until it’s time to file your quarterly taxes.
How to calculate the amount to put aside?
This is often the most challenging step in putting your freelancer taxes in order. This is not the most accurate method—talking with a professional about your situation would be best—but it’s called the “safe harbor” method; it aims to give you a decent prognosis on how much money to put aside. Calculate 20%-25% of money earned within a year. Break up that total into the quarterly amounts due. Then, calculate how much you need to put aside per month to reach that quarterly goal.
Remember, according to the IRS, the minimum amount needed to file as a self-employed person is only $400. It’s important to get ye olde tax ducks in row to avoid a hefty tax fine.