Maybe you call it freelancing, or you call it contract work, or you call it gig work. Maybe you have multiple part-time jobs in which you are paid hourly, with no benefits. Perhaps you have started your own business out of your home.
In any of those scenarios, you are considered “self-employed’’ by the Internal Revenue Service (IRS). But, because you are making money in what you are doing, you must pay taxes on the revenue you earn.
Below we will outline some of the information that freelancers and gig workers need in order to meet their income tax obligation.
For people employed by companies that withhold taxes every paycheck, determining their tax bill is generally only something they worry about once a year. If you're self-employed, however, you will need to consider your eventual tax bite with every payment you receive.
Self-employed individuals must maintain complete records of income as well as expenses. Doing this will ensure that you pay exactly what you owe—no more, and certainly no less.
Pay Taxes Upfront
If you are paid without having taxes withheld from your paycheck, you must determine how much of each you will owe at tax time. Then, you will take that amount out of your income yourself.
The IRS has a form
that allows you to estimate your income yourself. But if you're new at this, it may be best to initially consult a tax adviser. Once you have determined the percentage of each payment received that needs to be put to taxes, you will set that amount aside and arrange to make quarterly payments to the IRS.
You will generally need to make quarterly payments if you expect to owe more than $1,000 in income tax annually. Not doing so may leave you subject to IRS penalties.
The process is relatively easy. As indicated here
, there are forms to fill out. For your first such form, you will need to reference your tax return from the previous year. There are also forms to fill out if the estimated income listed on your initial form changes (like when you get a new gig to add to your total or lose a gig along the way).
The Self-Employment Tax
To properly contribute to Social Security and Medicare, self-employed individuals pay self-employment tax
. This 15.3 percent of earnings goes to pay for the two federal programs for retirees, with 12.4 percent going to Social Security and 2.9 percent to Medicare.
The percentages come from your net business income, which is gross business income minus expenses.
Deduct Carefully and Thoroughly
If you are self-employed and work out of your home, you can deduct certain costs
that relate to your work.
Among the items that you can deduct
- the business-related portion of your phone and internet bills
- office supplies
- office furniture
- computer program software updates
You need to be able to provide documentation of these costs, including digital or paper receipts.
You may also deduct business travel expenses
, including the cost of gasoline and parking fees, and reasonable accommodation and dining costs. As of mid-June 2022, the standard mileage deduction
is 62.5 cents per mile, an increase of 4 cents per mile from the beginning of 2022.
Other Potential Deductions
There are some other deductions you may be able to take:
- Retirement plans: There are several types of retirement plans that allow self-employed workers to contribute to their retirement, including the Self-Employment Pension program. You may be able to deduct your contributions to one of these plans.
- Business meals: If you are interviewing someone or completing business deals over dinner and you pay for that meal, you may be able to deduct this expense. For 2022, you can deduct 100 percent of the cost of meals from restaurants, if the meal is business-related.
- Vehicle expenses: If you use a vehicle exclusively for business, you can deduct vehicle expenses related to fuel, maintenance, license and registration, and insurance.
- Health insurance premiums: You may be able to deduct health insurance premiums for yourself or your family.
The IRS does allow taxpayers to itemize these types of expenses on their tax returns rather than use standard deductions. This also includes averaging costs on a monthly or annual basis, and providing all of the necessary documentation if asked to produce it. For most freelancers, nonetheless, taking the standard deduction is generally the best option.
The Nature of Your Business
Most of the advice offered so far in this article relates to freelancers or gig workers.
If you are self-employed but operate a business that offers a product, you have different options related to deductions (think shipping and packaging). Your situation is more complicated, and again might be best served with a consultation with a tax adviser.
Operating a licensed business can also include entertaining clients, promotional expenses, depreciation of equipment and furniture, real estate assessments, and other deduction opportunities. This IRS guide is a good place to start the conversation with your tax adviser.
Filing Your Tax Return
When the new year comes around and you are required to file your tax return, your quarterly payments will reduce your tax bite, and may allow you to get a tax refund.
If you're self-employed, every employer who paid you $600 or more in non-employment income is required to issue you a 1099 form, which you will likely use in Schedule C of your tax return.
And Then There Is the State
Most U.S. states use your federal tax form as a starting point for the completion of your state tax return. That is true for self-employed citizens as well. For your state return, you will again be using the 1099 form and schedule to indicate how much money you made.
Every state allows for a different degree or percentage of deductions for self-employed costs. Determine the specific circumstances allowed within your state. Take advantage of deduction opportunities that are listed on your own state’s tax website.
Depending on the complexity of your self-employment business, there is software to help you complete your calculations.
Some of the most popular
of these software programs are H&R Block Self-Employed
and TurboTax Self-Employed
are lower cost options.
Again With the Tax Professional
It does cost money to have a professional do your taxes, or discuss your tax situation. However, this is a good idea for new freelancers or gig workers who want to make a living from this type of employment. A one-day consultation could save you hundreds or thousands of dollars in tax liabilities going forward. After that one-time consultation, you may be able to handle your future tax reporting details yourself.
Now, to Get Started
The IRS offers the Self-Employed Individuals Tax Center
, which provides all of the basic information you need to proceed. It explains different forms of self-employment, the tax obligations of the self-employed, how to make quarterly payments, and what you can deduct from your home office expenses. Start there.
The Epoch Times Copyright © 2022 The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.