In 2019, 57 million people in the US indulged in freelancing work, and most of them reported earning handsome amounts. Everything is good as a freelancer: no boss, no timing restrictions, no extra expenses, no office, etc. The only thing that can trouble freelancers is income taxes for freelance workers, which sometimes seem unfair. If your net income during the year, as a freelancer, is more than just $400, you are liable to pay tax. So, it can be tough being a freelancer in the US!
Recently, President Trump issued an executive order guiding the US Department of the Treasury to defer payroll taxes from September 1, 2020, to December 31, 2020. The executive order announced a deferral on the 6.2% employee’s share of Social Security tax, but it does not clearly say anything about self-employed or freelance workers.
Today, in this blog post, we will discuss how much income tax a freelancer has to pay, typical deduction categories for freelancers and, first of all, discuss, how US tax law sees a freelancer.
Employed vs. Self-Employed
There is no such term as “freelancer” existing in the eyes of the law. Workers are primarily divided into two categories: Employed and Self-Employed.
Employed workers are regularly salaried people employed by an employer. The employer manages taxes for its employees.
Self-employed workers are those people that are self-employed and work directly for clients. They are their own boss and manage their own taxes, usually by themselves or with the help of a specialized accountant for freelance workers. Freelancers and business owners fall into this category.
Now, let's find out how much income tax freelancers have to pay.
Taxes Paid by a Freelancer
A freelancer has to pay two types of tax: regular income tax and self-employment tax. All workers pay (“regular”) income tax, but freelancers are also liable to pay self-employment tax. Freelancers have to pay 15.3% of self-employment tax, which includes Social Security tax and Medicare tax. To follow, a regularly salaried person who works for an employer is also liable to pay a payroll tax, which is usually shared by both employer and employee. An employee pays a 6.2% Social Security tax and 1.45% Medicare tax, and an equal share is paid by his or her employer. However, as a freelancer is considered both an employee and an employer, a freelancer has to pay both parts.
Deduction Categories for Freelancers
Tax laws may seem a little unfair toward freelancers, yet there are many deductions available for them as well, which a regular employee cannot avail. Here are four primary tax deduction categories for freelancers:
Home Office
If you are working as a freelancer, most probably, you have a home office. The IRS allows you to write off the expenses related to your home office, such as rent and cost of utilities. Nonetheless, it is your responsibility to ensure you are not using home office space or utilities for personal use. Writing off personal expenses may incur penalties. For this reason, it is advisable to hire an accountant for freelance workers while filing your income taxes, to become familiar with specific IRS rules and to avoid making important mistakes.
Equipment
If you are purchasing equipment for work purposes, then it is eligible for tax deductions. Such tax benefits are not available to regular employees.
Education
The IRS also allows you to write off the education costs incurred in upskilling to meet your business’ requirements. Your continuing education and certification costs are tax-deductible!
Travel and Meal Expenses
Lastly for this blog, you can also include business-related food and travel expenses at a rate of 50% in your tax deductions. However, it is strictly advised to separate your personal and business expenses in order to avoid any potential conflict with the IRS. As it is actually quite easy to make mistakes while filing your taxes when freelancing, experts advocate hiring an accountant consultant for freelancers to avoid any surprises.
