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We stay within the post-recession economic system. Together with extra skepticism over the way forward for the economic system, many have purchased into the gig economic system—the place individuals take particular person contract jobs fairly than working for a bigger firm. Some would possibly name it the American dream however for those who don’t plan accurately, it may flip into one thing of a nightmare.
A examine by authors from Princeton and Harvard Universities discovered that the variety of freelancers grew from 10.1% in February of 2005 to 15.eight% in late 2015. Laptop jobs maintain essentially the most freelancers however customer support, medical, and writing industries appeal to many as properly. Freelancers beware—you is likely to be setting your self up for monetary turmoil for those who don’t consider your self as a enterprise proprietor. It has to do with taxes.
As a freelancer, it’s a must to pay taxes simply as you’d for those who labored for a bigger firm however with one necessary caveat. You’re liable for all the taxes. What you could not know is that when you find yourself an worker, your employer pays half of your complete Social Safety and Medicare taxes. Thus, as an worker of another person’s enterprise, you paid 6.2% of your wage (as much as the taxable most) for Social Safety tax, and a 1.45% Medicare tax, (mixed complete, 7.65%.) Your employer was required to match these funds. Thus, your complete contribution for Social Safety and Medicare (your fee plus the employer’s) was 15.three%. And, in fact, you additionally had cash withheld out of your paycheck for revenue taxes calculated primarily based on the data you supplied your employer on a W-Four type. As a freelancer, it’s a must to pay each elements of the Social Safety and Medicare taxes. As an alternative of paying the federal government your revenue tax plus 7.65% (mixed Social Safety and Medicare tax), you pay revenue tax plus 15.three% (minus any deductions or credit) That 15.three% is named a self-employment tax.
Figuring out the whole quantity of revenue tax, Social Safety and Medicare taxes you may owe for the 12 months is not straightforward. You must consider your revenue, your tax bracket, deductions, and credit. If your enterprise is comparatively steady, merely have a look at final 12 months’s tax return and take numbers from there. Or, a really tough estimate is to take 35% of each greenback you make, put it in a separate account and use it to pay taxes. In case you are required to pay state and metropolis revenue taxes, remember to calculate their price for the 12 months, too.
Tip: When figuring out the charges you cost your prospects, remember about these additional taxes you may owe. Too many freelancers don’t cost sufficient for his or her providers as a result of they don’t take taxes into consideration.
The IRS isn’t going to mean you can maintain onto the cash you owe them till tax time. Typically, if you’ll owe greater than $1,000 in taxes on the finish of the 12 months, it’s a must to make quarterly estimated tax funds. In case you file as an organization, your threshold is $500 however most freelancers ought to take note of the $1,000 quantity.
How A lot Ought to I Pay?
In case you owe estimated taxes, how are you aware how a lot to pay? In case you use tax preparation software program like TurboTax, it’ll let you know what it believes your estimated taxes will probably be primarily based in your earlier 12 months’s tax return. The IRS additionally has varieties and worksheets that can assist you. Intention for 100% of your earlier 12 months’s taxes or 110% if you’ll earn greater than $150,000.
Estimated taxes are due quarterly—April 15, June 15, September 15, and January 15 of the next 12 months. There are exceptions to those dates however you’d nearly definitely have an accountant advising you of these dates if that was the case. Make sure you pay your estimated taxes on time. In case you do not, the IRS will cost you a penalty.
In case you don’t need to pay your taxes in Four quarterly installments, there are just a few different methods. First, for those who obtain a refund in your taxes, apply it to your estimated taxes. Second, for those who or your partner are employed by different firms, you may ask your employer to withhold further taxes out of your paycheck every week. (You will must file a brand new W4 and fill in line 6 to point the extra quantity you need to be withheld.) To provide you with the quantity to withhold, divide your estimated tax by the variety of paychecks you’ll obtain and have them with out that quantity. For instance, for those who plan to have a tax legal responsibility of $7,000 however you receives a commission from an employer as soon as monthly, have them withhold an additional $583.34 from every paycheck.
Be taught extra about estimated taxes on the IRS web site.
The beauty of proudly owning a enterprise is that your bills are deductible. Practically each buy you make that immediately goes to the operation of your enterprise will scale back your taxable revenue. Every part from workplace provides to mileage, to the usage of a house workplace, will land you deductions and scale back your tax burden. Beware—you don’t need to exaggerate or take deductions you may’t show. In case you’re audited, the IRS will ask for receipts and substantiation of your entire deductions. Be taught extra right here.
First, let’s watch out with that phrase. An worker is anyone in your payroll. You must withhold taxes and even pay a part of their tax burden. Bear in mind the self-employment tax above? You must pay it. When doable, freelancers choose to rent contractors (different freelancers) as a result of the employer doesn’t have to fret in regards to the taxes. All of it falls on the contractor.
You don’t get to decide on. How you employ that particular person determines in the event that they’re a contractor or worker. For instance, do you management what the employee does and the way they carry out their job? If the reply is sure, they’re an worker of your organization. Earlier than hiring assist examine this on the IRS web site.
In case you rent a contractor, they usually make greater than $600 per 12 months, it’s a must to file type 1099 reporting their wages. In the event that they’re an worker, you file a W-2 type.
If all of this appears somewhat overwhelming, you in all probability want an accountant. The truth is, if your enterprise is making properly into the five-figures, you want an accountant anyway. Articles like these are nice for normal schooling however solely an accountant can have a look at the specifics of your enterprise and set you up for achievement.
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