Freelance Taxes: What Every Freelancer Needs to Know

a month ago   •   8 min read

By Zekeriya Mulbay
Table of contents

Managing taxes for freelancers is a difficult task. You need to know the tax code well so you don't run into problems with your taxes. But managing poorly means fines, penalties, and financial strife.

Here's where our guide can help!

To help you navigate through the basics and fundamentals of various taxes in the domain of freelancing, here is a complete guide compiled by us. Once you learn how to manage your taxes, you will have no trouble confronting the tax season.


What are Freelance Taxes?

Now that you have begun to work as a freelancer, you might ask why taxes were not on your list of worries as an employee.

The reason for this might be that your employer calculated the amount to be withheld for taxes from your salary and the tax was directly paid to related authorities. Similarly, Freelance Taxes are calculated by the gross income of a freelancer minus the expenses.

Different countries have distinct types and methods of calculating taxes. You will soon discover that the tax season also differs. Things can be a bit complex to understand now that you have to pay the tax directly to the Revenue Services. This implies that you have to learn how to measure the amount you owe.

Furthermore, you have to gather information about freelance taxes and organize your financial accounts as well. Frankly, paying your taxes is the most harrowing task you will encounter as a freelancer.

Nevertheless, by the end of this brief guide, you will have an idea of what to do next to manage your taxes.


What is Taxable Freelance Income?

Every country has tax brackets for self-employed people with varied rules for business expenses, depreciation, etc.

Tax Brackets are the divisions at which the rate of tax shifts in a progressive tax system or the system in which the tax rate rises with the increase in the taxable amount.


How to pay your Freelance Taxes?

Although we have tried our best to provide authentic and accurate knowledge to keep you informed, keep in mind that it is not to be adopted as a replacement for legal advice.

If you have questions related to filing taxes, it is always better to reach out to a lawyer or tax advisor in your country. People may think that it hiring an advisor is more of a burden but in fact, they can save you from a lot of confusion.

An advisor also called a tax consultant is an expert in the domain related to tax accounting and laws around taxes. As tax law varies from country to country, the procedure and tax bracket set by your government are best understood by the advisors.

When to pay your Freelance Taxes?

The duration of the Freelance Tax payment is generally declared by the State authorities of the country. Make sure to pay the tax within the time period as skipping it might result in penalties.

For instance, a freelancer in America is required to pay taxes quarterly as assigned by the Internal Revenue Services while in the United Kingdom, the time period is twice a year.


Tips to pay Freelance Taxes

1. Hire an expert

To file your taxes, it is always best to hire a specialist in the field. As filing and accounting taxes can be a stressful situation, they will guide you through the process.

YouTube videos and articles may help you to achieve a basic understanding of taxes, but it is not a good idea for a self-employed person to file taxes without consulting an expert first.

2. Bank Balance is not Equal to Profit

Many freelancers think that the amount in their bank is their profit but it is actually the cash flow. Your tax return should include your income and expenses. If you leave these details out, you might have your information audited.

3. Do not file it just before the deadline

Running to gather the required documents and bank statements is just a source to intensify your anxiety. You wouldn't have the time to contemplate and put in all the deductibles which can result in leaving out some valuable information that can benefit you to curtail some amount of the tax.

It is best to not wait until the last moment and file your tax beforehand.

4. Make sure to Balance your Checkbook

If you were a commerce student, you might know about balancing your chequebook. In case you don't know what this means, it is best to hire a tax expert to do the work for you.

5. Keep all your Documents stored on your phone or laptop

Of course, you are not going to keep your documents in a plastic file. With the advent of technology, it has become easy to store and organize your document and it is environmental-friendly too!

6. Save money for the taxes

It is a great feeling to receive your salary free from taxes from the clients and spend it on your necessities and luxuries.

Nevertheless, it is important to save up some of the earnings for the taxes. Even if you haven't calculated the amount you need to pay, put aside at least 25% of your earnings for tax purposes.

You don't want to create a problematic situation at the last moment when you find out that you have spent all your income.

7. Coordinate with your Tax Advisor

Tax Advisors have to record and schedule the taxes of a number of people before the season so that they are filed before the deadline. So, you have to do your part by coordinating with them.

Respect their time and give them the data they need so that they can schedule your tax without a hurry.

8. Your Friends and Family are not Authentic Sources

Family, friends and colleagues are the first people we go to in times of worry. However, when it comes to tax-related issues, it is best to not seek their advice in case they are not professionals themselves.

They may give you the right information but they may misguide you unintentionally as well. It is safer to hire an expert.


How do Freelancing Platforms charge taxes?

Upwork

Currently the largest freelancing platform with more than 10 million freelancers, Upwork charges sales tax only in the States where it is mandated as each country has their own rules and regulations.

It also charges VAT or Value Added Tax to freelancers from certain countries and unless specific requirements are met, freelancers are not exempted from this tax.

Keep in mind that the fees charged by Upwork on the salary you get do not have any connection with government taxes so you have to pay extra for that.

Fiverr

As per the Terms of Services, freelancers are responsible for their own taxes and Fiverr does not withhold any amount from the income of the people of the majority of the countries. However, it can issue an annual statement of the earnings of a user.

Australia, Russia, Israel, UAE, USA, New Zealand and Mexico are the countries for which Fiverr collects taxes from the buyers and transfers them to the government under purchase tax. For example, due to new tax laws in the United States, one might need to pay Sales Tax for services they obtained from Fiverr.

Flexiple-

Flexiple also set rules and reduces the tax amount from the earnings of a Freelancer depending on their country. For instance, Flexiple has mentioned that it deducts taxes from the income of Indian users in accordance with section 194J.


Freelance Taxes

As a freelancer, it is essential to have a basic understanding of accounting and taxes in your country.

USA

In the case of America, if you earn $400 or more in a year working as a freelancer from any single employer, the Internal Revenue Service (IRS) consider you self-employed and you have to file tax as a business owner. This is called the self-employment tax.

You will need an income statement that demonstrates the income and expenditures of your business. As IRS classifies you as a business owner, you can regulate your tax schedules and add tax-deductible expenses. If your client has paid you more than $600, you need to file Form 1099-NEC to affirm your source of earnings.

India

As per the Income-tax Act, freelance income comes under the "Profits and Gains from Business or Profession" category. The gross income would be the aggregation of all receipts you obtained during the financial year, i.e., from 1st April to 31st March of next year. Indian Freelancers also include income from other sources.

If the total income is 2.5 lakhs, it is not subject to taxation. Income between 2.5 lakhs and 5 lakhs have a 10% tax, 5 lakh and 10 lakh have 20% and above 10 lakhs have 30℅. When the total tax is more than Rs 10,000, a freelancer is also required to pay Advance Tax every quarter.

Customers generally deduct TDS from the fees of the freelancer. Accordingly, TDS deductions can be proclaimed while submitting Income Tax Return. As GST or Goods and Services Tax is enforced on all the goods and services, the rate of it will differ according to the services of the freelancer.

Freelancers do enjoy deductions due to expenditure and depreciation however these should directly pertain to the work you are doing and should be completely spent as such in case of expenses.

UK

Freelancers pay taxes twice a year which is named "payment on account." For self-employed people, tax is based on profits which are the gross earnings deducting the expenses. Freelancers as well as employed individuals can year £12,570 annually without paying taxes, also called personal allowance.

In Wales, England and Northern Ireland, 20% tax is charged if you earn between £12,570- £50,270, 40% between £50,271 - £150,000 and 45% above £150,000. There are two extra tax bands in Scotland.


Conclusion

Tax systems differ from country to country. While countries like USA and India have an income tax, United Arab Emirates, Monaco, Bahamas and Bermuda are some of the countries free from income taxes.

Paying tax is not necessarily a bad thing especially when a part of it goes for your health care and social security. You might wish to avoid paying taxes but as you generate more profit, you are required to pay taxes as well. If you decide to neglect the taxes later, they will become a source of trouble afterwards.

Although most of the tax systems in the world are quite complex to understand, with the right guidance and knowledge, the entire process can become manageable and free from chaos.

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