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Being an independent contractor,filing taxes is not as simple as any other job you do like freelancing, etc.
Whether you want to put a step forward in the world of freelancing or you are already in deep ends,filing taxes and those tax situations should not have to be complicated and should not hurt you bad.
The tips mentioned below have differences with respect to the business structure you have choosen. i.e., if you have a S-corporation or a Limited Liability company.
How can you pay taxes as an independent contractor?
Sole proprietorships are default for most of the freelancers so lets have a look on what those taxes look like.
The first thing you need to do is Make Quaterly Payments and to do so you need to estimate quaterly taxes and figure out what or how much you need to set aside.
Earning money as a freelancer will cause you to make direct transactions i.e., you name a price-perform the service-get paid by client and all this will be done without you holding any money to cover taxes or benefits.
Though you are earning it all by yourself and not getting any extra for paying taxes,the government still wants its cut. For this,agood rule you can follow is to set aside 30%-35% every time you get paid to cover your federal taxes.
This will include both the federal income tax(10-37%)and also the selfemployment taxes.Traditional workers pay 7-8% of their pay check as taxes the rest of which are matched by their employer but being an independent contractor,you owe both employee and employer share which can cause you taxes around15% as long as you earn $400 as a freelancer.
When are Quaterly Taxes due?
As the name suggest,quaterly taxes should be paid for each quater of the year which means you need to pay them four times in a whole year but they do not break into even quaters for example , in many places , the quaterly taxes are schedules as –
- By 15th of January for Sept. 1 – Dec. 31 of the previous year.
- By 15th of April for Jan. 1 – March 31.
- By 15th of June for April 1 – May 31.
- By 15th of September for June 1 – Aug. 31.
These taxes can easily be filed online or can also be paid by phone or snail mail. The addresses will only vary depending on your location and you must also consider the fact that 30-35% of the amount you have set aside previously will or may not cover the state or local taxes which vary depending on the location.
How to file your tax return?
Just like any other traditional employee,you will also need to file a tax return if you have earned atleast $400 . As long as you have kept up with your quartertly taxes,that would not be a painful job to handle but if you have missed any, you may owe the IRS.
The return report should include the sum of your earnings which would be used to calculate the tax bracket and total tax burden and being a freelancer,you will need to diligently record every single penny you earn.
How to calculate your total income?
Every client of your’s from whom you earn more than $600 in a year must file a form in your name which you will recieve instead of a W-2 at the tax payment time. Even if you earn less than $600 from any client,you will still need to report those in your annual income as the penalty for underreporting is 20% of the amount you owe.
What can you deduct as a small business owner?
The best thing about freelancing is that you are eligible to make certain business related deductions which will inturn help you to lower the overall tax burden and help to keep your enterprise cost-effective to run.
Some of the deductions can include –
- Office supplies.
- travel expenses related to work.
- the cost of your home office but only if you have a designated space in your home that you use exclusively for business purposes.
- Professional services if you have any like those of an accountant.
- half of your self-employment taxes.
The bottomline is that although independent contractor taxes are significantly more complex than those who work a traditional job,it is surely hard to compete with the freedom and flexibility of a freelancer’s lifestyle.