What taxes must freelancers pay on time?
Are you new to freelancing? Find out what taxes you need to pay, and how to ensure you pay them on time.
There are several benefits to freelancing. One big one is having the flexibility of working to your own schedule, rather than having to fulfil a straight nine-hour duty.
You also have the opportunity to earn more than if you were employed. However, there are also some inconveniences, such as the need to file your own taxes.
In line with this, below are some of the taxes that you need to pay on time when you are a freelancer.
As a freelancer, make sure that you gather and compile documents that reflect all the sources of your income.
Often freelancers have several gigs that allow them to earn. If this is the case for you, then make sure that you keep a document of each of your income sources and consolidate them in an organized place.
You will also need to determine your 2022 income tax bracket. This will help you in completing the individual tax forms necessary to reflect the income that you earn from each of your clients.
As a freelancer, you are your own boss. On the plus side, you get to make all the decisions for your work. On the downside, you need to settle the tax dues that an employer usually handles for their employees.
This is known as self-employment tax, and encompasses social security and health insurance taxes. For regular employees, these taxes are deducted from their paychecks automatically.
When you’re employed by a business, a certain amount of money is deducted from your monthly salary to pay for your taxes. And at the end of the financial year, there is a good chance that you might get a refund, particularly if your total deductions exceed the right amount that you need to pay.
As the income of freelancers greatly varies, instead of a monthly deduction, you need to settle your taxes quarterly. In this case, the amount that you need to pay is based on how much you have earned during the past three months.
When you miss a quarterly estimated tax payment, then you will probably owe the government money. For this reason, you need to make estimated tax payments every quarter, before the deadline, to avoid any penalties.
Once you are filing for your tax dues, you may realize that the amount of money you have to pay can be a hefty sum. Enough to leave you short, particularly if you haven’t allotted a certain sum each time you receive payment.
Fortunately, you can leverage various tax deductions as a freelancer. Here are some to consider.
If you are a freelancer who works from home, then the home office deduction can be applicable in your case. This allows you to write off rent or utilities for the part of your home that you use as an office.
However, you need to ensure that you have a dedicated space in your house exclusively for your freelancing activities. For example, you cannot occupy your kid’s room and use it as an office while they are in school.
Travel and meals
You can claim travel and meals as a tax deduction but it can be quite tricky to do so. For example, you can deduct the amount that you have to spend to travel to a job or have a business meal with a client.
However, you need to provide evidence that these expenses are necessary because the government needs to ensure that you don’t simply write off your vacation costs as business expenses.
Education and certifications
If you need to enrol in a certain course to get certified, and the knowledge that you garner is in line with what you need for your freelancing career, then you may be able to write off your expenses for your education from your tax dues.
However, you need to establish that the education or certification that you get is closely related to your business such that you can’t write off a certification in gardening if you are a programmer.
You need to keep up to date with your freelance taxes!
There are many upsides to being a freelancer. But one of the biggest downsides to self-employment is taking responsibility for your own taxes.
So make sure from day one that you are aware of your tax liabilities, schedule into your calendar when you need to file your taxes, and stay on top of your paperwork, keeping careful records of all work you do and payments you receive (plus expenses).
And as your employer isn’t helpful deducting your tax at source, you also need to remember to put aside enough money from your freelance earnings as you receive them, to ensure you don’t get a nasty shock when your tax bill comes through.