Freelancing Help USA
polycounter lvl 18
Ok guys,
I've never freelanced, and since I was doing taxes, I was wondering, how do taxes work for freelancers in the US?
I read on a website, that freelancers get taxed about 48% of their eranings since they kind of act as their "empolyer" and "employee", which supposedly at a normal job, your employer pays taxes, and then you pay taxes(about 25% for myself).
Also, do you pay these taxes quarterly?(estimated tax).
I just have no clue how this whole thing works financialy. Maybe it's super easy, but there are so many things, like how the hell do they even know if you recieved money from someone?(assuming that that someone is NOT a company, but just one guy or something)
any insight anyone can shed on this would be awesome.
Thank you in advance.
-Jeremy
I've never freelanced, and since I was doing taxes, I was wondering, how do taxes work for freelancers in the US?
I read on a website, that freelancers get taxed about 48% of their eranings since they kind of act as their "empolyer" and "employee", which supposedly at a normal job, your employer pays taxes, and then you pay taxes(about 25% for myself).
Also, do you pay these taxes quarterly?(estimated tax).
I just have no clue how this whole thing works financialy. Maybe it's super easy, but there are so many things, like how the hell do they even know if you recieved money from someone?(assuming that that someone is NOT a company, but just one guy or something)
any insight anyone can shed on this would be awesome.
Thank you in advance.
-Jeremy
Replies
Talk to an accountant if you're going to be pulling in money that you'll have to pay taxes on because you'll also be able to write off your computer equipment, part of your rent if it's used as a home office, software, etc... those write offs should help cut the tax burden for your freelance work.
A good share of my career was spent as a freelancer. The good advice in this thread does nto start until you get down to robioto. Here's my experience:
No client is going to withhold taxes for you. That is your responsibility. Period.
You are going to be liable for federal, state, and local income taxes. You will have to pay the total amount of your social security taxes ... about 15% of your income. Medicare payments have to be made too.
If you make over a certain amount of money in a calendar year from a client who is going to deduct what they pay you for your work against HIS taxes (it used to be just $600.00 back in the day), they have to file tax paperwork on you with the IRS (and state gov't). Those forms will eventually be compared against what you report to the taxing authorities.
Even if you think you don't have to pay taxes, you still have to file. If it looks like you're going to owe taxes on your income, you will be required to make quarterly payments to the taxing authorities. There can be tax penalties for estimating poorly and underpaying.
Investigate the tax laws of the state in which your client is located. I got nailed by this once when doing work for EA. California has "franchise taxes" that allow them to tax contractors living outside their state. They came after me several years later and I am still bitter about the way it happened.
Keep track of all the expenditures you make to produce your income. That can include depreciation on hardware and software, reference materials, travel expenses to conferences, the cost of maintining an internet connection and website hosting, etc.
If you are unsure about tax matters, get the advice of an accountant, knowing that while it is not free, it can be deducted as a business expense.
Important fact to remember: The government takes tax fraud seriously. When they put Al Capone away back in the 30s, it was for Tax Evasion, not for his numerous violent offenses as a notorious gangster. While that's definitely an overdramatic comparison, getting a letter from the IRS is rarely a pleasant experience.
Here is an example. Say the client is in Canada? Then what?
Also, how do you know wether you should be paying quarterly taxes? is there a threshold there? If you don't pay estimated tax, do you just pay it when you file taxes in the new year? The whole matter makes freelancing seem daunting and not worth it. If thew bottom line is withhold x amount(saay 25%) from your earnings then that's simple enough.
Also, I should mention this would be a part time thing, on top of my day job, and it wouldn't be a whole lot of freelancing, meaning not a huge income off of it. Does that change anything?
thanks again!
Even if you are earning at the lower end of the food chain, setting aside 25% of your gross income is a good rule of thumb. Legitimate business deductions can reduce your taxable income (for both income and SS tax purposes) and standard deductions could eliminate any income tax you may owe. But you're still going to be liable for SS and Medicare tax on any income that remains after business deductions.
Technically, you should be making quarterly payments even if they are small. Realistically, you can probably make a lump sum payment when you file your annual tax return. That being said, you still may be liable for penalties for taxes not paid on a quarterly basis.
If your day job generates taxable income, then it's important to accurately record, report and file your self-employed income. At the end of the day, your self-employed income ends up being lumped in with your salary or hourly wages for tax purposes. For overall tax purposes, they are not separated. If your day job income already puts you in a situation where your income exceeds the standard federal deduction, then you can be certain that any income above and beyond your legitimate business deductions will be fully exposed to taxation.
BTW, Tax software like Turbotax or MacIntax (is that still around?) has tools that can walk you through estimating taxes on future income and filling out the forms, etc.
So from what I understand, I lump my total income together, my salary allready has taxes withheld, but I would need to pay estimated taxes on the freelancing income. It makes sense, but doesn't all in the same vein. It's making my head spin. I give up!
There's no such thing as not having to pay tax on 30% of your income like ebagg mentioned before. That will quickly land you in trouble if you're ever audited.
If the amount of contract work you're going to do is a fairly small amount of your overall income, simply set aside about 35% or more of it and don't touch it. When you do your taxes at the end of the year, include the contract work as income, and the 35% you stocked away should roughly cover the taxes you owe on it, including social security.
If your contract work is going to be a substantial amount of your income, you may need to pay estimated taxes to the IRS as the income comes in. There's no penalty for NOT paying estimated and waiting until the end of the year, but if you make a lot of money at it this year and didn't pay estimated, they may force you to do it next year even if your contract work substantially slows down.
I've had to deal with all this in my wife's photography business. If you make a lot of money at it and you don't understand how taxation on income generally works, then you should consult an accountant. But in general you don't need one if the contract work is only a small portion of your yearly income.
Paul, the only thing that I'm pretty sure of is that there is no penalty for not paying estimated tax on additional income quarterly. You can pay it in a lump sum with your tax return, but part of your return after the first year of self-employed earnings may FORCE you to fill out the estimated tax form for the follwing tax year. This essentially makes you pay a quarterly tax. The additional income has to be pretty high for that to come into play though. If you're making an extra $10K a year on contract work, you won't be required to pay estimated tax payments.
I really appreciate all the help/advise. It's got me on the right track now, so thanks!
@SuperOstrich It's been quite a while since I've had to do estimated tax on any kind of regular basis (13 years!). What I'm thinking of may be the penalties one gets into for underpaying estimated tax. My income varied (I worked for clients in different industries with pay scales that were all over the place), so I could never truly guess my actual future income. It was a pain.
Last year when I sat down with the nice lady that does our taxes, according to her, you are only able to deduct computer equipment and all home office expensing if it is used 100% for work and not personal use. Apparently too many people where remodeling guest rooms and calling them home offices and deducting a large chunk of the cost from their taxes, so the IRS put a stop to that and tightened the laws on home businesses. So be careful what equipment you use for what, if you plan to take it off your taxes.
Of course tax laws change every year and I haven't gotten around to doing them this year so things could have changed.
@vig -- the home office thing has been an issue forever. Keep records. For many folks posting on this forum who are also working freelance as game artists ... there is almost NO time spent on the computer that isn't relevant to your work as a freelance artist. Are you working on games ... then your game play time is research. Messaging other artist friends is networking. Etc. Etc.