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Taxes
You need to be more aware of taxes than you likely were as an employee
Once you strike out on your own as a freelancer, you will need to be more aware of taxes than you likely were as an employee. While you were on someone else’s payroll, they automatically deducted taxes from your paycheck. You were only obligated to think about paying taxes around Tax Day itself.
As a self-employed person, you are now responsible for paying all your taxes yourself. That includes: Federal, state (if applicable) and city/local income taxes; self-employment tax and city business taxes. For example, self-employed people whose profit exceeds a certain threshold are taxed in New York City.
Although you don’t have to be obsessed with taxes as a freelancer, you do need to know a few basics.
The IRS treats self-employment differently from regular employment. As a result, self-employed people often pay more in taxes as a percentage of their income. The main difference is that employees split the cost of Social Security and Medicare taxes with their employers. As a freelancer, you’ll have to pay both the employee and the employer portion of Social Security and Medicare, for a total of 15 percent of your income. (This is before income taxes, remember.) And that’s not all: About three-quarters of self-employed Americans work in cities that tax unincorporated businesses at around 4 percent of profits.
The good news is that, as a freelancer, there are many tax deductions you can take and expenses you can write off. For instance, 50 percent of the self-employment tax you pay is deductible. And you can write off business expenses for things like office supplies, computer hosting for your website, conferences you attend for work and business lunches. Be diligent about compiling receipts for any expenses you plan to list on your tax returns. Capital expenses, like buying a new computer or desk, used to have to be depreciated over time. But currently there’s a small business tax break under IRS Section 179 that allows you to immediately deduct up to $250,000 worth of equipment you purchase for your business.
The IRS has a self-employed tax center where it covers many of the details you’ll need to know about taxes as a freelancer.
If you have someone working directly for you as an employee, you’ll have to pay the employer’s share of Social Security and Medicare for them as well as withhold taxes from your employee’s paycheck. (See this IRS link about employees versus independent contractors for more information.)
You won’t owe federal self-employment tax until your business becomes profitable. But since many freelancers, particularly home-based, have low overhead and few startup costs, your venture into freelancing may become profitable almost immediately. Typically, self-employment tax must be paid on a quarterly basis, with deadlines on April 15, June 15, Sept. 15 and Jan. 15. The amount of quarterly tax you owe for the upcoming tax year should be calculated when you file your income tax returns for the previous tax year. Because the calculation will be based on income projections from the previous year, these quarterly payments are called “estimated taxes.”
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