Striking out as a freelancer, rather than working for someone else, can be empowering and liberating in equal measure.
However, there are some hurdles to overcome when you become self-employed which you don’t face as an employee, and becoming responsible for your own tax affairs is one of the biggest.
So that you don’t make common mistakes as a fledgling freelancer, here are the main things to keep in mind where tax is concerned.
Understanding self-employment tax
First and foremost, it is sensible to read a guide to self employment tax so that you have a base level appreciation for what is involved.
The main point to note is that everyone is obliged to pay towards Social Security and Medicare, which is combined under the Federal Insurance Contribution Act (FICA). For employees, FICA is handled by the employer, but if you are self-employed, you need to set aside cash to cover this from your earnings.
Those with permanent roles pay 6.2% of income up to $142,800 as tax under the Social Security section, while Medicare is taxed at 1.45% of all income, creating a combined rate of around 7.65% for FICA for the majority of people.
Self-employed individuals must cover double this, or 15.3%, because employers are required to match contributions for workers, which leaves them in an arguably worse position in terms of their tax burden.
Recognizing the role of deductions
It may sound like self-employed people are taxed at a far higher rate by the federal authorities, and while this is superficially true, as a freelancer you also get to reduce your tax bill with the help of allowable deductions.
Each year you can claim back a whole variety of costs that you are required to pay in order to keep your company ticking over. This can include everything from the expense of setting up an office space in your own home, to the bills you pay for your cell phone, internet connection and computer equipment.
You can also claim back travel costs, including automotive expenses, as well as the fees you pay for professional training courses to further your career prospects.
Effective use of deductibles is important, because self-employed taxes only apply to your net income, rather than the full amount you bring in annually. So the 15.3% comes off after you have taken costs into account.
Embracing software tools and expert assistance
Many of the newly self-employed people out there will be frustrated and intimidated by the idea of having to track their expenses, record their earnings, and deal with the process of actually filing a tax return.
Luckily we live in an age where it has never been easier to run your own business or work as a freelancer, thanks to a combination of the software tools available and the ease with which you can affordably hire a qualified, accredited accountant to balance your books and file your returns for you.
The most important point to make is that the sooner you start using these tools, and the sooner you get in touch with an accountant, the simpler your tax experience as a self-employed person will be. It is only by procrastinating and delaying that you will likely encounter stress, and will probably make unnecessary mistakes.
The latest software tools are both a breeze to use, and if deployed correctly could help to keep your tax bill in check and ensure that you are not overpaying on any kind of income tax you might owe in your state or region, whatever industry you are in.