Tax Season When You’re Self Employed vs Freelance
WFHR EditorLast updated: September 1, 2023
You might not notice a difference when you look at self-employed vs freelance taxes.
To better understand this, you must understand the difference between self-employment and freelance status.
In this article, you’ll learn everything you need to know about these two and the tax implications of both.
What is Self-Employed?
Self-employed is a general term for anyone who isn’t “traditionally employed.” Self-employed people have a level of autonomy and free reign that others don’t. They don’t report to a boss in their 9-5 office job.
The tax pros at Taxslayer have a great way of explaining what self-employment is. The benefit of self-employment is you get to make decisions for yourself. If you don’t feel like working, nothing is forcing you to work. You don’t have to ask permission to take a day off, take a long lunch, or run some errands.
Even if you’re self-employed, you can still have people working under you or alongside you in your operation. Examples of self-employed people would be entrepreneurs, people who found start-ups, small business owners, and more.
Managing taxes is also what freelancers or self-employed do. Good thing there is tax software, which is very helpful in making life easier.
What is a Freelancer?
Freelancing is a form of self-employment. The big difference here is that freelancers specifically work by themselves.
The defining characteristic of a freelancer is that they can handle many different projects from many clients. This means that freelancers need to treat clients like their bosses, and they need to follow directions to a certain degree.
Examples of freelancers are artists, writers, and musicians. If you’re working independently and dealing with several clients, you’re probably a freelancer.
See Related: Best Apps for Freelancers
The Difference in Taxes
After learning the definitions, you should realize that there’s no difference in the way the taxes work. As a freelancer, you are also self-employed.
The requirement to pay taxes is exactly the same.
Does Freelance Work Get Tax?
Knowing the difference, you might be asking yourself tax questions now. Does freelance work get taxed? In a conventional office setting, the HR department takes care of all the taxes you owe, and everything is really easy. In freelancing, you’re getting money directly from clients, and you might think you’re getting away without taxes.
Yes, freelancers need to pay taxes on all the money they make. If you make above $400 in any given year as a freelancer, you need to file taxes on every single dollar you make. You can use HR Block to save time during this process.
I know that there’s a desire to try to hide the money, but I highly recommend you follow this legally and pay your taxes. The IRS has a funny way of finding out where your money came from – it’s not worth the risk and legal troubles.
See Related: Best Project Management Apps for Freelancers
How Much Tax Does a Freelance Pay?
This leads you to your next question, how much tax does a freelancer pay? It all depends on how much money you make. If you need help, you can always use this free hourly wage calculator to help.
You just learned that freelancers pay taxes which might be bad news for you. There’s another piece of bad news for you.
In a typical office setting, your employer is fronting half of the employment tax owed. The government collects 7.65% on both the employer and employee. You’ve only ever seen the 7.65% until now.
As a freelancer, you are the boss and the worker. The IRS expects you to pay both portions of the 7.65% employment tax, totaling 15.3%. But wait, there’s more. You’re still on the hook for your typical income tax.
Getting paid directly by a client doesn’t mean you can get away without paying taxes. So how much money should you set aside when you consider how much tax a freelancer pay? My suggestion is to put 30% of your earnings to the side.
Why 30%? Well, your tax will depend on how much money you make. The more money you make, the higher taxes you pay. In general, setting aside 30% of your income protects most freelancers.
Having too much money set aside is a good thing. Come tax season, if you only pay 23%, you have all the money you need and more. I like to be overly conservative when it comes to tax savings.
See Related: How to Register as a Freelancer
How Often Does Freelance Work Get Tax?
Since the taxes aren’t getting taken out of each paycheck, it’s important to file your mid-season taxes regularly. If you didn’t already know, you can file quarterly estimates and pay taxes every three months. There are helpful blogs to talk to other freelancers and find out about their tax experience, too.
Remember that the yearly tax date is on April 15. As a freelancer, you should file mini-taxes on the 15th of January, April, July, and October. Sometimes, you’ll get charged an extra fee and late filing charge if you don’t keep up with these quarterly estimates.
If it’s your first year in freelancing, there are some exceptions to this rule. After you file year-end taxes, you must ensure you keep up with quarterly filings.
It lets you pay your taxes in small, bite-sized pieces rather than a massive, multi-thousand dollar charge come April.
How Does Freelance Work Get Tax?
This is where a lot of the confusion comes in. In any other job, you get what’s called a W9 form from your employer. This has everything you need for taxes. Come tax season, you copy and paste the information into LibertyTax and move on with your life.
As a freelancer, not only do you not get a W9 at the end of the year, but you also (probably) don’t have just one client. This means multiple streams of income from multiple different people.
If you want to minimize the headaches of tax season, you can open a business bank account. Have your freelance income and expenses come out of one account, no matter what. At the end of the year, you have a paper trail of every deductible expense and all of your income in one place.
Before setting up your business bank account, there’s a little bit of detective work required. If you used specific websites for your freelancing work, check your payment summaries. Look through your PayPal and bank accounts to see how much money came in.
If you made over $20,000 AND had more than 200 payments through PayPal, you’ll get a 1099 form from PayPal. If you made more than $600 with a client, they should send you over a 1099 form (unless you were paid to them through PayPal).
See Related: How to Become a Freelance Editor
Double Taxing in the Freelancing World
As you’re racking your brain and going through your different accounts, there is one important thing to remember. It’s possible to accidentally report payment twice, resulting in double the taxes due.
How does this happen? Let’s say Jim paid you $100 on a freelancing website for your work. The website pays you through PayPal, and then you use PayPal to transfer your funds to your bank account (a super common technique in freelancing).
You go through the paper trail and add up income from all of your sources and inadvertently summarize that Jim paid you $300. You tell the IRS that you received $300, and they tell you that you owe them a certain percentage of that 300. The truth is that you only made $100 from Jim, but since it bounced in three different accounts, you tripled the amount you owe in taxes.
If you are getting multiple 1099s, make sure that none of them are double-reporting money that you made. It’s not uncommon for a freelancer to get a 1099 directly from a client and through PayPal. Be meticulous with keeping track of these figures, and you’ll avoid overpaying in taxes.
My advice? If you don’t have a business bank account, compare the income you received from every source. If your freelance website says you made $30,000, PayPal says you made $30,000, and your bank shows an income of $30,000, then it’s safe to say that you made $30,000, and that is just the path the money took. Don’t wrongly construe that you made $90,000.
See Related: How Much is $45,000 a Year Hourly?
Tax Software to Help with Self-Employed vs Freelance Taxes
If you want to tackle taxes on your own, there are a lot of convenient programs to help. These are created by tax professionals, and many of them do all the heavy lifting for you.
Any option would be a good pick for you – whether you’re self-employed or a freelancer. These programs will walk you through the steps and tell you where to find any information you might not have yet.
You would want to know your income and deductibles before you get started, though.
See Related: Freelance vs Self-Employed
The Importance of Taxes as a Freelancer
In a conventional job, most of the headaches associated with taxes are taken care of by your employer. In freelancing, you don’t have this luxury. That makes the process harder, but it also highlights the importance of taxes.
If you fail to pay your taxes on time, a few things happen. First of all, you’ll be hit with an additional late fee. Next, the IRS can start targeting your assets and repossessing your items. This is legal for them until they reclaim how much money you owe them.
They can sometimes garnish your wages which means they take money from your bank to pay the money you owe them. The IRS has a lot of legal power, and not paying taxes is a huge legal problem. Make sure you understand the importance of this. Even “money under the table” must be claimed and paid taxes on.
See Related: Proven Ways to Sell Your Skills Online
FAQ
I know that was a lot of information. Let me try clarifying some questions you might have in this section.
How Can I Tell How Much I Made?
The best way to tell is by using a business bank account. The money left in the account will be your net income after expenses. If you don’t have one of these accounts, you’ll have to leaf through your different banking, freelancing manually, and payment apps to get a grand total.
Make sure you don’t count income twice from the same source and wind up double paying taxes. As a freelancer, always know your worth when bidding your rate with your employer. With all these deductions, make sure that you are well compensated.
How Much Tax Does a Freelance Pay Exactly?
The answer depends on how much money you made exactly. Taxes are taken out as a percentage of your wage, and that percentage goes up as you make more money. Depending on what state you’re in, the state income tax will also change.
The rule of thumb is that you should put aside 30% of any and all money that you make as a freelancer. This ensures that you have the money when it comes time to file.
Should I Get a Tax Pro?
In a lot of cases, you don’t need a tax professional. Thanks to the digital age, you can find much information about freelancing and taxes. As long as you keep a good paper trail and follow instructions well, then you will be able to file taxes yourself through Taxact.
Sometimes, you can work with a tax professional through different tax programs. This is a great option if it’s your first time filing as a freelancer and you need a little help. You can reach out through any website and talk to their team to find the best option for your particular case.
Which Tax Software is the Best?
A lot of people have strong opinions, one way or another, about the best tax software. From my experience, all the ones I listed above are strong candidates. They walk you through the process and are created with freelancers in mind.
I would suggest visiting each site and seeing which one works best for you. There’s no wrong answer here.
What if I Paid Too Much in Taxes?
This can happen to anyone eventually. Paying too much in taxes doesn’t mean that your money disappears forever. For many people, you’ll get that money back the next time they file.
What If I Didn’t Pay Enough in Taxes?
You will still owe the amount outstanding when it comes to taxes. If you are underpaid, intentionally or not, you’ll have to correct it as soon as possible. In many cases, there will also be a small fee that you have to pay in junction with the remaining balance.
This is why it’s important to keep track of your money as a freelancer. It will help you avoid this mistake when you finally file your taxes. If you’re starting out as a beginner writer, there are great places to find jobs and make some extra money to pay the taxes that you owe.
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