There are so many freelancing benefits. You can work from anywhere, make your own hours, and make a living doing what you love. But there’s one issue that deters so many people from freelancing full-time: you have to do your own taxes.
So many people are used to filing a W2, which means taxes are taken out of their check throughout the year, and they get their taxes back in April.
But freelance employees who file 1099 have to pay quarterly taxes throughout the year — and hope they don’t owe anything else in April.
But taxes don’t have to be scary. Here’s your guide to taxes for freelancers.
Why Are Freelancers Responsible for Their Taxes?
Many first-time freelancers usually ask why they’re responsible for their own taxes and why they were never responsible for taxes before.
The answer is simple: as a freelancer or contractor, you’re not an employee of the company. Therefore, the employer has no responsibility for withholding your taxes.
But this fact may seem mind-boggling. They pay you and you work for them — how are you not an employee?
Well, it’s our tax classification system. When you first join their staff, you sign a contract that states you’re an independent contractor, not a permanent employee.
Why Do You Pay Quarterly Taxes?
Now you understand why you have to pay taxes. But here’s another fact that confuses new freelancers — why do you have to pay quarterly taxes?
The confusion makes sense. You don’t pay quarterly taxes as a permanent employee. But your taxes are withheld with each check and your employers pay these taxes for you.
As a freelancer, you don’t have this benefit. So you have to withhold these taxes yourself.
The IRS has a “pay as you go” tax system. You pay taxes throughout the year, and file at the beginning of the tax season (or April) to ensure your taxes for the previous year were correct.
The easiest way to organize this “pay as you go” method is paying four times a year: in April, June, September, and January.
But how much do you pay? This is where it gets complex. First, you need to determine your tax rate. The IRS separates this by income. And there are additional expenses included in your quarterlies, such as state and local taxes.
You can use an online tax calculator to determine how much you pay quarterly. Try and be as accurate as you can.
How to File
There are many ways freelancers can file. The easiest way to pay your quarterlies is through the IRS website. You can even sign up for direct pay, where the IRS takes your taxes out of your bank account every quarter.
If your taxes get complex, you can hire a CPA, or certified public accountant. You will spend money on their service, but the tax process is easier and you can even pay less to the IRS than you were before.
For April’s tax time, you can always file your tax return online.
Now You Understand Taxes for Freelancers
Taxes for freelancers can get pretty difficult. But once you understand the basics, paying your taxes isn’t so hard.
Always remember to pay your quarterlies and estimate your pay through your tax bracket. You can file your taxes in April online or with a CPA.
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