Going freelance often seems like an ideal. You imagine that you work on your terms, when and where you want, and pocket all your profits…
But is it really as simple as that in real life? Do freelancers have to pay taxes, for example?
And that’s exactly the question that this article is here to answer.
What’s more, we’ll also answer all of your most frequently asked questions on the subject along the way, including “What taxes does a freelancer have to pay?”, “How much do freelancers have to pay in taxes?” and “Do you need to declare (or report) freelance income?”.
By the end of the article, when we get to the wrap up, you will be able to see whether the financial side of the freelance lifestyle actually lives up to your expectations.
Please feel free to scroll ahead to any section that jumps out at you. Here goes!
- 1 Do You Need To Declare (Or Report) Freelance Income?
- 2 What Happens If You Don’t Report My Freelance Income?
- 3 What Taxes Does A Freelancer Have To Pay? Do They Have To Pay Income Tax? Do They Have To Pay Any Additional Taxes?
- 4 How Much Do Freelancers Have To Pay In Taxes?
- 5 How To Handle Your Taxes As A Freelancer?
- 6 Wrap Up
Do You Need To Declare (Or Report) Freelance Income?
If your freelance income is merely a side hustle and not your full time occupation, you may wonder whether it’s even worth declaring or reporting the income you make from it.
Well, it turns out that whether or not you have to declare your freelance income depends on how much money you make from it…
There is a threshold amount, and if your freelance income meets or exceeds this threshold for a particular tax year, then you have to declare this income as taxable income. The threshold amount is $400.
So, if you were to earn $400 or more in one year, this means that you have to declare yourself self-employed, even if it’s just a side job to supplement your main income.
Therefore, even if you don’t necessarily expect to meet the threshold of $400 in one year, it’s best practice to keep a close eye on how much you make, just in case you do in fact reach this threshold.
Because once you have hit or exceeded the threshold amount, you will be required to report all of your self-employed income to the IRS.
What Happens If You Don’t Report My Freelance Income?
Tax evasion is a felony, and a very serious crime at that. Purposeful tax evasion could even land you in jail.
And even if you don’t land up in jail, you will be punished. In addition to having to pay back the IRS the money that you owe, they also charge hefty fines on top of that as well…
The penalty fee for tax evasion is 5% per month on the amount of taxes you go. But this does get capped at a maximum of 25% after 5 months.
So, to walk you through an example, if you owed the IRS $1,000 in income tax, then you’d have to pay a $50 penalty for every month you fail to file a return, up to a maximum of $250 after 5 months.
What Taxes Does A Freelancer Have To Pay? Do They Have To Pay Income Tax? Do They Have To Pay Any Additional Taxes?
So, it turns out that in fact, freelancers ARE required to pay income tax. Provided, of course, that their freelance income meets or exceeds the threshold amount of $400 per tax year as mentioned earlier.
But that’s not all. In addition to paying income tax, freelancers are also responsible for paying a separate self-employment tax.
The reason for this is to cover certain costs, including both their social security tax for their pension when they hit retirement, and their Medicare taxes, which goes towards the likes of hospitals, hospices and nursing homes.
How Much Do Freelancers Have To Pay In Taxes?
Income Tax For Freelancers
The amount of income tax that a freelancer has to pay depends on many factors…
For example, as a general rule, the more money that you earn, the greater the proportion that you have to pay as income tax.
And just to complicate matters even further, the amount of income tax a freelancer has to pay also depends on what state they live in, and not all of them follow the same tax system…
Nine of the 50 states have a flat-rate income tax. These states are Colorado, Illinois, Indiana, Kentucky, Massachusetts, Michigan, North Carolina, Pennsylvania and Utah.
What’s more, it is expected that a number of other states will follow suit.
Self-Employment Tax For Freelancers
But when it comes to the self-employment tax that freelancers have to pay, this is set at a flat rate…
Freelancers are required to pay a self-employment tax rate of 15.3% of their total earnings for each tax year.
Of this 15.3%, 12.4% of this goes towards their social security tax, while the remaining 2.9% goes toward Medicare taxes.
How To Handle Your Taxes As A Freelancer?
The IRS has links to resources that can help you in the preparation and filing of your federal tax return, which you can access on this link.
The easiest way to file your federal income tax is by electronic filing.
But most importantly, you don’t have to go it alone. If you were to hire a tax professional, they can take care of all the nitty-gritty for you, so you can concentrate on running your freelance business worry-free.
So, in summary, any freelancer who earns over the threshold amount of $400 per tax year is required to declare this income to the IRS, and pay their fair share of income tax.
What’s more, freelancers also have to pay an additional tax, known as the self-employment tax.
This tax comes to 15.3% of their total net earnings, and it covers both their social security tax and the Medicare tax.
So, if you are considering going freelance, whether it’s full time or part-time as a side hustle, you would be well advised to keep note of your freelance earnings, so that you are not caught out and subjected to paying a hefty fine.