Self-employed? Here are tax implications you need to know

60 Million Freelancers

During the pandemic, many Americans got used to working remotely. Geographic independence and technological proficiency fostered fresh ideas about modern ways to make a living. Freelance work and its promise of lifestyle flexibility and personal agency appealed to many.

In the past year, a whopping 39% of Americans performed freelance work, the highest percentage reported since freelancing platform Upwork (UPWK) started calculating the data in 2014. This represents 60 million people and $1.35 trillion in earnings.

By comparison, freelancers added only $50 billion to the US economy in 2021.

A Taxing Issue

Being self-employed has its advantages. In addition to potential freedom and flexibility in the type, hours, and location of work, working for yourself can be financially rewarding as well. But, for some freelancers and independent contractors, one realm of life can be more complex: paying taxes.

While W-2 employees benefit from having taxes automatically deducted from their paychecks, those who are self-employed must manage this process themselves. This means keeping track of what is owed and paying on time, otherwise risking penalties imposed by the IRS. Federal income taxes must be paid regularly as income is received, which the IRS refers to as “pay as you go”. Making quarterly estimated payments can help freelancers avoid penalties. These estimated taxes are due on the 15th of April, June, September, and January for the fourth quarter of the prior year.

Minimizing the Guesswork

Estimating taxes can be tricky, especially for those freelancers whose income fluctuates to a larger degree. There are a few factors to consider when estimating your taxes. They include your expected tax bracket, deductions, and credits. It’s important to note that your payments must also cover self-employment taxes, the independent contractor’s equivalent of Social Security and Medicare taxes. In 2022, this amounts to 15.3% of 92.35% of your income.

If paying self-employment tax is a bitter pill to swallow, remember that some contract and freelance work can provide an opportunity to deduct business expenses. There are a wide range of deductions you may be able to take, including a home office, supplies for that home office, your computer, your car expenses, and possibly even a portion of your monthly cell phone and internet bills.

Considering taxes for people who are self-employed can get complicated (and tax laws can change from one year to the next), it can be helpful to enlist the help of a tax professional who specializes in freelance and small business taxes when preparing your return. To limit your tax liability in the form of penalties or net income, it is also essential to keep good records.

Freelancers work hard for their earnings. By keeping good financial records, preparing tax returns correctly, and tapping into deductions that can help lower taxes, it’s possible to keep more of that hard-earned income.

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