Freelance work is more popular than ever, with over 57 million Americans engaging in freelance work. Many people enjoy freelance work because it gives them the opportunity to set their own hours, work from home, and be in charge of themselves.
However, before you dive into working as a freelancer, it’s important that you understand the tax differences between freelancers and employees.
Check out this guide to discover how taxes are different for freelancers and employees.
Taxes for Employees
The great thing about working as someone’s employee is that your employer is responsible for taking care of all aspects of your taxes. They’re in charge of withholding the correct amount of taxes owed before they issue paychecks to employees.
They’re also responsible for withholding voluntary deductions, such as 401(k) contributions. How much is withheld in taxes will depend on where you live and how much money you make?
Depending on your income, you’ll fall into a certain tax bracket. Whatever tax bracket you fall into will determine how much is withheld from your paycheck for federal taxes. Typically, this amount is between 10 and 37 per cent of your total net income.
The amount that’s taken out for taxes will also depend on how you filled out your W-4 form. If you don’t claim any dependents and all of the money is for yourself, then you’re going to have a little more taken out of each paycheck. However, you should also see a bigger return at the end of the year.
If you do claim dependents, then you’re likely going to have a little less taken out of each paycheck. This may also mean that you owe some money at the end of the year. You’ll be able to see how much money was taken out of your paycheck each year on your W2 form. If you’re an employer, you can use this site to create W2 forms.
You may also have state and local taxes taken out depending on where you live. Again, you don’t need to worry about how much to take out for taxes, as employers will take care of all of this for you.
Taxes for Freelancers
As a freelancer, you’re responsible for paying your own income tax and your own self-employment tax. When someone hires you for a job, whether that job involves designing a website or fixing a window, the person who hired you will pay you a set amount of money.
But, the person who pays you is not responsible for factoring in taxes. When tax season comes around, you’ll be responsible for figuring out how much you owe based on your total income and where you live. If you’re not comfortable doing this on your own, you can purchase tax software or hire an accountant.
Luckily, as a freelancer, you’re also eligible for tax write-offs, such as home office deductions and other related business expenses.
Working as a Freelancer: Are You Ready to Do Your Taxes?
Now that you know what taxes are like if you’re working as a freelancer, it’s time to tackle your taxes for the upcoming year. The best way to stay on top of your earnings is to create a spreadsheet that details how much money you make and how much money you’re spending to keep your business afloat.
Be sure to check back in with our blog for more freelancing tips and tricks!