As a freelancer, you have complete control over your income and your schedule.
You are your own boss! Life is good! And then comes the reckoning – taxes.
All of a sudden, you’re not feeling so confident.
Deductions? Depreciation? FUTA? What?
Being your own boss might not feel so great right now. And if you didn’t adequately plan for taxes during the year, you might find yourself looking at a big bill.
In this article, we’ll look at some of the ways you can be a complete boss at taxes, just like you already are at everything else as a freelancer.
What taxes do freelancers pay?
Envato/MyLove4Art
In the United States, self-employed people pay the same federal and state income taxes as employees. They also pay an additional “self-employment tax” on their business profits. But wait – doesn’t the government want to encourage small businesses? Why would they slap an extra tax on them?
When you work as an employee, you still pay half of these taxes: you pay 6.2% of your earnings toward social security, and 1.45% of your earnings toward the federal unemployment program (FUTA).
Your employer pays the exact same tax for you. You probably don’t notice it, because it’s withheld from your paycheck and you never actually have to write a check.
But when you’re a freelancer, you are both employer and employee.
Envato/Microstock_Growth
This means you are responsible for both the employer and employee halves of the tax. In total, it adds up to 15.3% of your earnings.
As a freelancer, if you expect to earn more than a few thousand dollars from your business earnings during the year, it’s a smart idea to pay estimated taxes on your earnings throughout the year. This allows you to stay current on your tax payments without having a large bill, and possible underpayment penalties, at the end of the year.
How can I maximize tax deductions as a freelancer?
The good news? You don’t have to pay taxes on everything you earn. As a business owner, you get to subtract your business expenses from your total income.
Envato/Studio VK
Suppose you earned $100,000 in a year (yay!) as a self-employed consultant, but you had expenses:
- You had software to keep your clients’ data organized.
- You paid for social media and Google ads.
- You hired a part-time virtual assistant.
In total, you had $25,000 in expenses.
Do you pay taxes on the full $100,000?
No.
After your expenses, you had $75,000 in profit.
This is what you will pay taxes on.
Envato/BrianAJackson
To maximize your deductions, the best thing you can do is keep exact records of all your business expenses:
- If you have large assets you use for your business, like a computer or a vehicle, you can claim depreciation on these assets as well.
- If you have a lot of possible deductions, or have questions about depreciation, it’s smart to check with a tax accountant before tax season.
I’m living and working outside the US. What taxes do I pay?
One of the best parts about being a freelancer is the possibility of living as a digital nomad. However, living and working outside your country of citizenship can have consequences at tax time.
Envato/kitzstocker
Generally, if you live and work in a country, you will owe tax to that country’s government. However, US citizens owe US tax regardless of where they live and work. This means that you could potentially owe double taxes – both to the US and to your country of residence.
The US recognizes this and maintains tax treaties with many countries around the world. These generally allow US citizens to claim a tax credit on their US taxes for the full amount of tax they paid to a foreign government. This eliminates most of the double taxation problem. If you do still have to pay US taxes, it should be paid in US dollars.
For this reason, many expat Americans choose to keep a US bank account or another account with US dollars in it.
Foreign tax credit is a fairly complex topic with many exceptions and possible differences depending on your country of residence.
Consult a tax accountant with foreign tax experience if you have specific questions.
