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It’s no secret that COVID-19 has fundamentally changed the way we work and how we view employment, and many have turned to freelancing to get by. Many full-time employees have begun to leave their jobs, instead focusing on reskilling and making career changes. And with 47 percent of hiring managers reportedly choosing to hire independent professionals after the pandemic, demand for freelancers is at an all-time high. Choosing your own projects, working your own hours, charging your own rates and being your own boss can seem like a great deal. However, just because you manage your own business doesn’t mean you get to keep all your income – freelancers still have to pay taxes.
What taxes should freelancers be paying?
The Internal Revenue Service (IRS) classifies freelancers as self-employed individuals. As such, freelancers must pay self-employment tax (SE tax) on top of an income tax.
SE Tax
Employees are usually taxed for Social Security and Medicare contributions, but freelancers must pay for this themselves. This can be pretty hefty, as the current SE tax rate is 15.3 percent: 12.4 percent for Social Security, and 2.9 percent for Medicare.
Income Tax
Freelancers who earn more than $400 from their projects are required to file an income tax return to be able to pay the taxes you owe. The IRS enables the quarterly payment of taxes through the Estimated Tax system. The IRS provides a worksheet that you can use to track all your income and expenses to help you determine how much tax you should be paying.
Are there any tax-saving opportunities for freelancers?
Whenever you file your taxes, the goal is to reduce your liability to the lowest allowable amount. For freelancers, the following may apply:
Equipment Deductions
Remember that the taxes you owe are determined by your net profit or net loss, which can be found by subtracting your business expenses from your business income. Freelancers have a bit more room to do this, as they have more business expenses than the typical employee. This means that you can write off whatever expenses you have related to your business, such as equipment purchases.
If you use part of your home as an office for your practice, you may even be eligible for home office deductions. This is a deduction that applies to all types of homes and businesses.
Tax-advantages savings
Certain types of investments and savings are also tax-deductible, and they have the added benefit of making you financially ready for the future. You can look into starting a simplified employee pension (SEP) or a solo 401(k).
SEPs are available from most firms that offer brokerage accounts – financial accounts that hold securities like stocks, ETFs, and other assets. Freelancers can deposit up to 20 percent of their net income into an SEP and then choose how to invest the money based on the services the brokerage offers. All contributions are tax-deductible, and the money in your account will be tax-deferred until you withdraw it.
Upskilling and Learning Deductions
Even professionals experienced in their fields are seeing the value of reskilling. If you’ve been working in a specialized field and are exploring your options post-pandemic, it may be in your best interest to take some classes and join some networking groups.
Thankfully, the cost of professional development courses that you take to help ensure business success can be tax-deductible too. The same can be said for fees and dues you pay for professional associations, subscriptions to magazines and publications relevant to your business operations, and even networking conferences.
The key to figuring out your taxes and keeping things in line is to stay ahead: keep receipts and records of all your expenses and your income, and work from there.
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