Freelancing allows you to make money on your own terms, and though there are plenty of advantages to this type of work, it can be difficult to figure out your tax obligations and responsibilities. Here are the answers to some common tax questions regarding freelance work.
1. As a Freelancer, Am I Considered an Independent Contractor?
Yes. You fall into the IRS classification of an independent contractor. You do not have one specific employer, but a number of clients. Though these clients pay you to produce results, they can not tell you how to achieve those results. Ultimately, you are in charge of how the work gets done.
2. How Do I File Taxes for the Money I Make from Freelance Work?
Companies aren't required to withhold taxes for independent contractors. If you make over $600 as an independent contractor, companies must issue a 1099 form disclosing your earnings. If you don't prepay your tax liability up to 90%, then you have to file your taxes quarterly. These payments are due 15 days after the end of the quarter. If you do prepay up to 90% of your tax liability, you can file annually. You can do this using a 1040 form, Schedule C or if you qualify, Schedule C-Z.
3. As a Freelancer, What Taxes Am I Required to Pay?
You are required to pay most of the taxes that regular employees are required to pay - income, social security and medicare. However, if you make under $400 from freelance work after deductions, you don't need to pay social security tax. It's likely that you will have to pay a self-employment tax in addition to other taxes that your local and state governments dictates. You are not required to pay unemployment insurance taxes, since as a self-employed party, you do not qualify for those benefits.
4. What Deductions Can I Claim?
You are considered a sole proprietor, an owner of a home-based business. You can deduct anything that is used to operate and sustain this business. You can deduct meals, entertainment, travel and office expenses. You can even deduct portions of your rent or mortgage and your internet bill if you work from a home office. In order to claim these deductions, you have to determine what portion of your Internet usage is used for work and what is used strictly for personal affairs. Once you make these calculations, you can claim a percentage of the total expense.
5. Do I Need Any Special Licenses or Fill Out Any Special Forms to File as a Sole Proprietor?
That depends. Certain states require you to have a business license for your freelance business. These licenses, and the fees associated with them, vary depending on the nature of your business and a number of other factors. Check with your local government for more information.