You also need to familiarize yourself with the Schedule C, the self-employment schedule of Form 1040. This form is for sole proprietors or people running their own businesses. If you’ve been working freelance and haven’t filed, you may already owe the IRS based on company business filings. General Liability Insurance can provide protection against costs connected to property damage, bodily injury, and third-party accidents. Workers Compensation Insurance is required by some states if you have employees, whether they are part-time or full time. It provides protection against financial expenses you might incur if an employee is injured or becomes sick while on your clock.
- Both are required to pass rigorous testing and are recognized by the IRS to represent you.
- Even if you’re not certain if it’s a deductible expense or not, save the original receipt and record it in the moment, then let your tax professional make the final call.
- In this case, you should also be intentional about your recordkeeping because that recordkeeping will directly affect any tax deductions you might use to reduce your taxable income.
- That’s because every locality has its own rules and laws around how business expenses should be tracked.
- EzTaxReturn walks you through the filing process to help you uncover qualified deductions and credits and calculate your taxable income.
- 24,000, the paying company must deduct and remit that portion to KRA.
If you underpay these estimated taxes, the IRS will penalize you, so be careful. If you underpay your quarterly tax payments—these are estimates, after all—you’ll have to pay the remaining taxes when you file your annual tax return. If you expect to owe at least $1,000 in taxes for 2014 (after any deductions or tax credits), then you will most likely have to file Form 1040-ES to pay estimated taxes.
– Making Estimated Tax Payments
Self-employment taxes are specific taxes for Social Security and Medicare. When you work for someone else, the total taxes you pay are lower than when you’re self-employed. But as your own boss who decides your paychecks, you could have opportunities to save on self-employment tax. Income tax is a tax paid by all U.S. residents and is used to pay for a big chunk of the federal government’s annual budget. This is a graduated tax, which means you pay a higher rate on incremental dollars as you earn more.
Some freelancers prefer to have an EIN on hand instead of handing out their personal TIN. Not only does this look better professionally but it can also help in minimizing business risks. If you value your personal privacy or want to avoid identity theft issues, do look into getting an EIN.
However, there are instances where you might have a debit or credit when filing. This occurs when there is a variance between the PAYE reported by your employer and what you are filing. The variance will trigger a refund from the revenue authority or tax liability for additional tax payment.
Even if you are just starting out freelancing but already have a vision of becoming a bigger business in the future, it’s good to look into the EIN requirements early on. Independent work in a year, you’re officially in business as far as the IRS is concerned. https://turbo-tax.org/ Just think about what you could do with an extra couple of thousand dollars per year. You could roll it back into your business to buy a fancy new laptop or supplies. Or maybe you would rather use the savings to treat yourself to a vacation.
Don’t forget about other expenses
Choosing the right business structure, and organizing your finances in a tax-friendly way can help you avoid stress at tax time. Freelancing is a great way to help you build up a business with the flexibility and freedom you desire. However, there are ways to start on the right foot and avoid rushing through your taxes. For example, if you live in a 2,000-square-foot home, and your office is 100 square feet, you can deduct 5% of your mortgage, taxes, and utility costs. If you sell physical products, you will most likely collect sales tax and pay it to your state tax department.
The percentage you pay depends on how much you make, since standard tax brackets apply to both freelance and wage-earned income combined. Nowadays, more people have taken to supplementing their incomes with side gigs. For others, the freedom of being your own boss has drawn them to the world of freelance.
In fact, it is advisable to have more than one source of income. So, if you can manage to handle a side hustle, even offering your professional skills on the side, that’s perfect. However, you must report and pay tax on https://turbo-tax.org/freelance-taxes-101/ the additional income from your side hustle. If you feel stuck this tax season, this tax guide for freelancers in Kenya is an excellent place to start. Schedule C is used to report your net income from self-employment.
If you’re a freelancer, you’ll need to file what most would consider a «complex» tax return. This means you likely won’t be able to use any free tax software if you want to declare your freelance income or take deductions. As a freelancer and a self-employed person, the government recognizes you as a business entity whether you’ve incorporated yourself as a business or not. This means you can take certain business tax deductions that W-2 employees generally can’t.