Your Taxes as a Freelancer

Freelancing has taken off in popularity in recent years. It’s easier to find the jobs with the help of the internet, wages have been stagnant for quite a while, and the idea of earning a few hundred to a few thousand extra dollars each month is appealing.

What happens, however, is that many people begin freelancing without taking into consideration the effect that it will have on their taxes. There is nothing wrong with bringing in money on the side, and you don’t have to be set up as a business to do it. But you do need to make sure that you are keeping track of your income, and know just how much you will pay in taxes come tax season.

Taxes as a W2 Employee

When you are an employee, you get the benefit of having taxes automatically taken from your paycheck. While many people hate this, claiming it’s a free loan to the government, it’s actually in your best interest.

Your employer pays a portion of your taxes for you. Legally they have to pay half of your FICA taxes, as well as provide worker’s compensation insurance, and submit your taxes without charging you. In the end, you get the better end of the deal.

That’s not the case as a freelancer.

Taxes as a Freelancer

Your taxes as a freelancer are going to look vastly different than your taxes as an employee. And there are several reasons for that.

No Withholdings – As an employee, a portion of your earnings are held back. As a freelancer, you don’t get that option.

100% FICA – As an employee, your employer pays 7.65% of your FICA taxes. As a freelancer, you are responsible for the full 15.3%.

Self Employment Tax – If you’re confused about the FICA portion above, don’t worry. As a freelancer you pay self employment tax; it’s just paying the employer share of FICA taxes.

Without regular withholdings, and having that extra 7.65% included in your taxes, your tax bill can add up quickly. Especially if your freelancing brings in a lot of money.

But there is a silver lining. The self employment tax is deductible from your income. And being self employed you can write off a significant number of things: such as a portion of your cell phone bill, some of your utilities, mileage getting to and from meetings with clients, supplies, and more. Keep accurate records, save receipts, and don’t try to cheat the system or an audit might not work out well for you.

So what will your taxes as a freelancer look like?

First you need to estimate your total household income. Let’s suppose it is $50,000 plus $12,000 you make from freelancing. Using Bankrate’s income tax calculator, we see that you owe $11,290 (after standard deduction and writing off the employer half of FICA taxes). Without the freelancing income, your tax bill is $6,806 (not including any deductions you may have made for business expenses).

Earning $12,000 increased your tax bill $4,284. When it comes time to do your taxes in the spring, make sure you have figured your taxes as a freelancer.

Practical Taxes can Help

Fortunately, all you have to worry about is having enough in your savings account to cover anything that is owed when tax season rolls around. Leave the rest of it up to Practical Taxes, your accounting expert in Billings, MT. We know the laws, we know the rules, and we can help you get the largest tax refund possible. You work hard to earn extra income as a freelancer, don’t give all that money back to the government if you don’t have to!

Practical Taxes is located at 1503 13^th St. West in Billings, MT. We can prepare your taxes, help with your bookkeeping, understand your taxes as a freelancer, and do payroll if you need it. Call us today at 406-894-2050.