Did you know that in 2016 there were 55 million people in the United States that were freelancers?
It’s no wonder that with the number of freelancers nowadays self-employment taxes are an important subject people are trying to understand.
Being your own boss is great, but it also means paying your own taxes.
If you work as a freelancer, check out this guide to learn how to file freelance taxes.
Paying for Your Side Gig: How to File Freelance Taxes
Freelancers are considered self-employed, which means freelance taxes have to be filed as a business owner. In other words, this also means you’re also considered a small business.
The first step is to gather all of your 100-MISC forms from each of your clients. These forms are what you receive as a freelancer vs a W-2 from an employer.
If you earn $400 or more from freelance work that you do, the self-employment tax rate has to be paid. At a regular job, Social Security and Medicare taxes are automatically held, but when doing freelance work, these two taxes are why self-employment taxes exist.
The IRS considers a freelancer an employee and an employer, which is why they expect the whole amount of Social Security and Medicare taxes are taken out via the self-employment tax. The self-employment tax is in addition to the regular income tax rate that has to be paid to the IRS too.
Since you are now considered self-employed, this means there are expenses that you can claim on your taxes as tax deductions. Tax deductions are in place to keep track of how much of the pay wasn’t used to cover business expenses. The amount left after deducting business expenses from the total pay for the year is the amount the IRS can tax you on.
These deductions normally include:
- Business-related food expense
- Office expenses
- Equipment and supplies
- Hotel Stays
The guideline with business expenses for freelance work is that the expenses have to be ordinary and necessary. Making Tax Digital is great to use to keep track of expenses if you’re feeling overwhelmed with the different categories.
When you travel to a job for the work you do as a freelancer, that’s a business expense that can be deducted. If you’re commuting to an office, then the costs of traveling can’t be deducted.
If you have a dedicated office space in your home exclusively for your freelance work, you can apply certain deductions. You can write off rent, mortgage, and utility portions of your home for the area you use as a home office.
If you have a meal with a client for business, you’re able to write off the bill at a 50% rate. The key to business meal expenses is that you have to have proof those meals and expenses were necessary for the development of your business.
Welcome to the Self Employed World
Now that you have learned about freelance taxes and that you are no longer considered an employee but an employer too welcome to the self-employed world. Getting your taxes done won’t be overwhelming or a headache as long as you’re organized and know what to expect.
Are you curious about improving your newfound business? Check out our business tips blog for a wealth of information you can learn from.