Taxes on Freelancers in the USA

14 days ago   •   6 min read

By Zekeriya Mulbay

If you make a boatload of money as a freelancer and haven't paid your taxes, you would get in trouble with the tax department.

Taxes on freelancers are different from taxes for a 9-5 job. Suppose you earn more than $50,000 a month; you won't take the whole cheque. The taxes will be cut from your bank account.

Freelancer taxes are pretty complicated. If you earn $5000 as a freelancer, you get it all in your bank account with a nominal transfer fee. It seems remarkable, right?

It is, but you should report your returns from not getting your income confiscated by IRS with a letter.

Taxes on Freelancers in the USA

Moreover, there are overwhelming forms that a freelancer receives in the US. Most beginner freelancers are stuck in this turmoil and confusion of taxes.

In the next phase of our article, we'll simplify your tax troubles and guide you more about the taxes for freelancers in the US.


What are the Freelance Taxes?

If you are a beginner freelance in the US and haven't earned more than $400, you're free to roam around your desk.

The IRS (Internal Revenue Service) considers you self-employed if you have earned more than $400 in a calendar year. There will be an employment tax of 15.3% applied to your income. It includes a medical tax rate of 2.9% and social security of 12.4%.

Furthermore, if freelancers owe $1000 in a tax year, they will pay quarterly taxes based on their earnings. The quarterly taxes period is as follows.

What are the Freelance Taxes?
  1. First Quarter, April 15th. (Tax return report from the previous year and first quarterly payment).
  2. Second Quarter, June 15th. (2nd quarterly payment).
  3. Third Quarter, September 15th. (3rd quarterly payment).
  4. Fourth Quarter, January 15th. (4th quarterly payment).

Calculate your quarterly taxes; there is an IRS form 1040-ES of 2022. If you haven't paid the taxes on time, an extra interest charge will be imposed as a penalty.

Note: You won't have to file an income tax return file if you are a US citizen or don't have any tax liability in the previous year.


Which Taxes Need to be Paid by Freelancers

As a solo US freelancer, you won't be paying one tax. There are federal, state, and local taxes. Let's hear them, respectively.

Federal Taxes

  • By paying this self-employed tax, freelancers are granted Social Security and Medical care like employees when they retire. So, it's advantageous to pay social security and medical care taxes.
  • Every freelancer needs to file an annual tax report. It includes all the previous year's deductions and quarterly paid taxes to the IRS on April 15th.
  • You'll also pay taxes if your freelance business gets some profit.
Federal Taxes

State Taxes

  • You can pay your state taxes and the US federal tax.
  • Like IRS, you also file an annual tax report to your state tax department.
  • Each state has different tax policies; you may consult your state tax department to learn more about them.

States with Taxes

States with No Taxes

Kentucky (5%)

Florida

Indiana (3.23%)

Alaska

New Hampshire (5%)

Washington

Michigan (4.25%)

Texas

Pennsylvania (3.07%)

South Dakota

North Carolina (5.25%)

Nevada

Local Taxes

  • Some cities like New York have their taxes landed on freelancers and other businesses.
  • They also charge registration fees annually from businesses. The local taxes contribute 13% of the whole US taxes.
  • States which have imposed taxes on businesses and freelancers have a different number of taxing jurisdictions.

How to File Taxes on Your Own as a Freelancer in the US?

We mentioned Federal, State, and local taxes. As a freelancer, these are the only taxes you might pay; it depends on your city and state.

Here's what you can do to file taxes in the US.

  1. Get all the paper documents, including W-2 and 1099-MISC forms. The 1099 is a voucher, a miscellaneous payment your client paid for above $600. (1099-K form if you receive it through PayPal or any other service)
  2. Choose your method of how to file your tax return. Use IRS-recommended software for better tax turn.
How to File Taxes on Your Own as a Freelancer in the US?
  1. File your tax return's sole proprietorship business losses and profit on an IRS Schedule C.
  2. Your spouse's income will also be counted as a profit if married. If you're both filling together, both incomes will have taxes imposed.

How to Reduce Self-Employment Tax

You can't minimize your taxes much, but there are plenty of ways to reduce taxes to some extent if you are a business owner or a freelancer.

Let's check out some freelance tax tips about how to pay fewer taxes as a freelancer.

Expand your Businesses Expenses

The itemized deduction or the standard deduction won't affect your self-employment taxes. But, expanding your business expenses affects net income and results in low self-employment tax.

Get payments through S-Corporation Form

Another tricky way to reduce your self-employment tax is when your clients pay you through S-corp, but not directly. In this S-corporation form, you would pay yourself a salary from your corporation earnings, and the rest will be dividends. The dividends will not be counted as your net income.

Get payments through S-Corporation Form

It depends on whatever you choose your dividends; the net income will undoubtedly fall, and so your self-employment taxes.


Tax Traps to Avoid When You are a Freelancer

There are traps that you might fall into as a freelancer. Avoid these traps for smooth payments and transactions related to taxes.

Not Keeping Records

Do you know why most freelancers lose their business mileage? It's because they fail to keep their legit business records. If the IRS ever audits you, you won't have anything to show for a tax deduction.

The records depend on your business of how you take in and how you take out. Record some of the expenses with a receipt in your record book.

Estimate of the Taxes

A freelancer is responsible for all taxes, unlike an employee who upholds tax within your paycheck and sends it to the IRS.

You won't have to wait until April 15th to file your income tax return as a self-employed person. You'll have to clear it quarterly four times a year. Check out the dates we mentioned above.

However, the IRS can penalize your income with an extra fee if you underpay it as a freelancer.


Questions to Answers

1.How much freelance tax will I pay?

As we mentioned above, you'll be considered self-employed if you have a net income of more than $400. If it's above $1000, you'll file it quarterly every year.

Let's look at this table for single filers and the federal tax bracket of 2021 in the US.

Tax Bracket

Percentage to be Paid

-          $0-9,550

10%

-          $9,551-40,525

12% (+10% from $0 to $9,550)

-          $40,526-86,375

22% (+12% from $9,551 to $40,525)

-          $86,376-164,925

24% (+22% from $40,526 to $86,375)

-          $164,926-209,425

32% (+24% from $86,376 to $164,925)

2.  How much do I need to earn to file income taxes as a freelancer?

A freelancer with more than $400 bucks net income over a year can file a tax return. Check out the above headings to learn more.

3.  When do you start paying taxes as a freelancer?

If your net income exceeds $1000, you'll have to pay taxes quarterly on April 15th, June, September, and January.

4.  Do I need to have a saving strategy for retirement as a freelancer?

As a self-employed person, you must have 40 social security credits to be eligible for social security retirement and five years of credit. So, paying your social security taxes will benefit you after retirement, too.


Final Words

Freelancing might seem like a golden opportunity in this era. Yet, there are many taxes imposed and other duties in the US. That's one of the reasons why freelancers from the USA demand more than others.

Follow the advice and tips we have enlisted in this article to avoid any pitfalls. We hope we were able to clarify some of your confusion.

If you're a freelancer from other parts of the world than the USA, consider reading our articles on tax on freelancers in the UK, USA, Brazil, Philippines, etc.

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