Filing your taxes when you’re self-employed can be complicated, and unlike an employee, you need to save part of your income for tax payments. As a sole proprietor and business owner, you’re responsible for complying with tax law that is self-employed taxes by filling out the right forms and paying your dues.
What You Need to Know About Self-Employment Taxes
Freelancers, independent contractors, and sole-proprietors must take their taxes into account when setting their prices and planning their finances.
Here’s what you should know about self-employed taxes.
1. Your Tax Obligations are Higher as a Freelancer
When you’re employed by a business, your FICA tax burden (Social Security and Medicare) is shared between you and your employer. When you’re self-employed, you have to shoulder all of it. That means you’re responsible for a 15.3% tax rate plus your tax bracket income tax rate. Tools such as Taxcaster can help you crunch the numbers based upon your tax bracket.
2. You Need to Save Money for Taxes
Since your taxes aren’t automatically removed from your income, you have to save a portion of what you make. Most freelancers save 25% to 30% of their total income, but if you make more than $70,000 a year, you should save 30% to 40% to ensure you’re keeping up with your taxes. Something to keep in mind, some countries will offer benefits or tax breaks to work in their country. For instance, there is the Beckham Law Spain that lets you pay lower taxes for a certain period of time. Some countries even let up to 30% of your income be tax free.
It’s better to over-save than risk an audit. If you think you’ll pass the 30% threshold, add more into your savings account than you think is necessary. Or, you can save gradually by estimating your tax rate and saving that percentage every month. Do this if you’re 3 years into the game.
3. You Don’t Technically Receive a Paycheck
Freelancers can deposit all of their earned money in their checking account, but they don’t technically receive a paycheck. That can make it difficult for you to qualify for a mortgage or rent an apartment. However, you can print out your past year’s tax statement as proof of income.
4. You Can’t Use a W-4 Form to File Your Taxes
Knowing how to file your taxes step-by-step is the biggest hurdle for most freelancers because the process is very different from employment taxes. Instead of using Form W-4, freelancers have to file a Schedule C (Form 1040) if their self-employment earnings exceed $400 in a year.
You may also receive multiple 1099-NEC forms if you worked with several clients. These forms prove to the IRS that you worked for the client as a contractor. You don’t need to fill out these forms yourself nor send them to the IRS, as your clients should handle that burden for you.
5. You Should Stay On Top of Your Bookkeeping
As you earn more business and hop back and forth between clients, your bookkeeping will become more complicated. It’s a good idea to keep your invoices and itemized deductions in one place so you don’t have to spend hours preparing your tax documents next year.
6. You Can Deduct Most of Your Business Expenses
If you are Self- Employed You can deduct Most of Your Business Expenses. To offset some of your tax burdens, the IRS allows self-employed individuals to take advantage of deductions. These deductions range from rent, vehicle mileage, business trips, and utilities. You can possibly reduce your tax burden by 25% to 50% if you spend a lot on your startup.
Since you won’t have health insurance, an employer-backed 401 (k), or other insurance, you should sign up for most of these benefits. While they will be expensive upfront, you can write off your premiums and retirement contributions, which can save you even more money.
7. You May Have to Pay Quarterly Taxes
If you are self-employed then You May have to pay quarterly taxes. If you paid $1,000 or more in taxes last year, or you expect to pay $1,000 in taxes this year, then you’ll have to pay quarterly taxes. To calculate your quarterly taxes, take your last year’s income and divide it by 4. Use Form 1040-ES for this purpose and file it online before the deadline.
