Freelancing is often touted as a great side hustle, especially for those in debt. Almost any personal finance blog will tell you to start freelancing to earn some more cash. Freelancing writing, designing, photography- they’re all options!
And while that is true, starting a freelance business comes with responsibilities. Specifically, tax responsibilities. The government wants it’s cut of any money you earn, whether as a freelancer or not. So let’s talk about how to be prepared for freelance taxes.
Starting to freelance in any kind of business has probably never been easier than it is today, thanks to the internet. With just a computer and wi-fi access, you can start a blog, reach out to established businesses and pitch yourself, and create an audience of followers on social media.
That’s why people often suggest freelancing as a second source of income. It’s a good idea, but there’s a lot to know before you dive in.
Any money you make is subject to federal taxes. Depending on which state you live in, you may also be subject to state taxes, like income or sales tax.
If you make more than $400 as a freelancer, you need to pay freelance taxes. Such a tiny amount, right? I told you the government wants its cut.
What are Freelance Taxes?
Freelancers are generally hired on a project by project by project basis by different people. This means a couple different things for your freelance money.
1)The companies that hire the freelancers don’t pay any taxes on behalf of the freelancer. That means the individual has to pay those taxes, for things like Medicaid.
2)Your tax information doesn’t come on a W-2 form. Instead, it comes on a 1099 form.
3)Your paycheck is the entire amount you earned from the company. So you need to withdraw the tax amount and the amount you want to reinvest in your business, plus the money you need to live on.
So now you can begin to see that freelancing is more complicated than connecting to wi-fi and raking in the big bucks.
Freelance taxes are also generally paid four times a year. I call them freelance taxes, but you may hear the term ‘quarterly taxes’ or ‘estimated taxes’. They all mean the same thing. Freelancers are allowed to pay an estimation of their taxes once per quarter of the year. This makes your tax burden smaller each chunk of the year- instead of having to pay $8,000 in April, you can pay $2,000 every three months.
The 30% Rule
A good way to stay on top of your tax requirement is to put away 30% of each paycheck you receive. In traditional W-2 employment, the employer pays roughly 15% in taxes for each employee, and the employee pays roughly 15%.
As a freelancer, you count as both employee and employer. So you have to pay 30%. Freelancers do get to take deductions on things like work equipment and space. This can greatly reduce your tax obligation.
Do Your Homework
Before you start freelancing, do your homework. Make sure you can afford both your taxes and to profit off your work. You should also look into things you can deduct. Meeting with an accountant is always a good idea!
Looking for more great articles on how I handle my money? Try these articles: