Also known as freelancers, self-employed professionals have different tax requirements from regular employees. Referring to those individuals who operate businesses as sole proprietors, as well as those who function as independent contractors or members of a partnership, self-employed individuals must pay taxes on their income just as ordinary workers do. Understanding your unique tax burden as a freelancer is the best way to protect yourself and your assets from the IRS.
Income vs. Self-Employment Tax
If you have ever held a full-time job, then you probably noticed that a percentage of your income was missing from each paycheck. This is because many companies take money out of their employees’ checks for federal income and state tax requirements, as well as contributions to Social Security and Medicare. Unlike those individuals whose taxes are withheld by their employers, self-employed persons must make individual tax payments over the course of the year, typically every quarter.
In addition to paying an income-based tax on their earnings, freelancers must also pay a self-employment tax that covers their contributions to Social Security and Medicare. If you are self-employed and make at least $400 a year through your business, you will likely need to pay self-employment taxes on your earnings in addition to income taxes. Understanding your full tax burden as a self-employed person is essential to protecting your assets and avoiding penalties.
Understanding the Freelancer “Double Tax”
As a self-employed individual, you may have heard of a phrase called the freelancer “Double Tax.” While self-employed persons don’t pay double the taxes as their peers with more traditional jobs, freelancers do pay twice the Medicare and Social Security contributions. For traditional employees, the companies they work for pay half of their Medicare and Social Security burdens. However, self-employed persons must pay the total amount due on their own. Thankfully, freelancers can take a number of deductions to help reduce their tax burdens. When in doubt, consult with an accountant or tax professional to determine what costs can be legally deducted from your annual taxable income.
Filing Quarterly Tax Reports
Unlike those individuals whose taxes are withheld by their companies, self-employed persons are responsible for filing separate tax payments over the course of the year. At each of these quarterly deadlines, freelancers must make estimated tax payments based on their expected annual income. Because individuals who fail to file quarterly tax payments—and those who pay too little—can be subject to penalties, it’s important that freelancers calculate their anticipated tax burdens accurately. The IRS Form 1040-ES, also known as the Estimated Tax for Individuals form, is an IRS worksheet used to calculate quarterly estimated taxes. In general, individuals should use last year’s tax return as a guide when determining payments. Divide last year's unfunded tax liability by four to identify your quarterly payment sum for this year.
Once you’ve determined your tax burden, you can easily submit your payments online using the Electronic Federal Tax Payment System (EFTPS). As a freelancer, your estimated tax payments are due by the 15th of April, June, September and January, respectively. Individuals who fail to submit their payments on time may be at risk for penalties.
State-Specific Tax Laws and Guidelines
Along with federal taxes and Social Security and Medicare contributions, self-employed individuals are required to pay certain state and local taxes. Because each state has its own unique tax requirements for freelancers, it’s important to read up on your state-specific tax laws as well as its special requirements for the self-employed.
As a freelancer, it’s especially important to follow all the applicable federal and state laws regarding tax requirements. Remember that, when it comes to tax law, ignorance or misunderstanding of the law is no defense. Following all appropriate tax guidelines to the letter can help protect you and your business in the years to come.