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ore and more people are turning away from traditional full-time jobs and choosing to start their own freelance businesses nowadays. When you consider the benefits of freelancing, this comes as no surprise. As a freelancer, you are your own boss. You control your work hours and can choose how much or how little you want to work. You can even choose which clients to work with and how much you want to charge per project or hour.
However, despite all this freedom to choose, there is one primary requirement that you can’t opt out of: paying estimated quarterly taxes.
There’s no escaping tax season just because you’ve chosen the freelancing route. Everybody who earns above a certain limit must pay tax, whether you freelance full-time or part-time. As long as you are receiving an income, regardless of how you are earning it, you are subject to federal tax laws.
Here’s where far too many freelancers tend to get careless. Some ignore their tax liability completely, while others miscalculate their taxes. Both of these mistakes can cost you dearly.
So to make sure your freelancing business stays safe financially, this quick guide to paying taxes in 2024 will help you avoid the common pitfalls of filing freelance taxes.
Understanding Self-Employment Tax & Tax Liability
Taxes on freelance earnings are calculated differently from taxes on income earned from a regular 9-5 job.
For those who work full-time jobs, Social Security and Medicare taxes are automatically deducted from their paycheck. The employer then covers 50% of those taxes.
Because freelancers do not have an employer or a regular monthly income, they do not get these deductions at the source, nor do they benefit from their employer’s contribution. To offset this scenario, where the freelancer is both employer and employee, all freelancers pay self-employment taxes in addition to their regular income tax. The self-employment tax rate is 15.3%.
The Schedule SE Form 1040 is an excellent resource if you need help calculating your self-employment tax. It gives detailed information about what you should and shouldn’t include in the calculation. If you meet specific requirements, you may also be eligible for deductions such as the employer-equivalent amount of your self-employment tax on your form 1040.
Timeline For Paying Freelance Taxes
If you expect to owe at least $1,000 (adjusting for any withholdings) in taxes for 2024, you must pay estimated quarterly taxes starting from April 15, 2024.
Here is the schedule for the quarterly estimated tax payments in 2024.
- First estimated tax payment - April 15, 2024
- Second estimated tax payment - June 17, 2024
- Third estimated tax payment - September 16, 2024
- Fourth estimated tax payment - January 15, 2025
What To Know About Paying Freelancer Taxes In 2024
Know the minimum on which you have to pay taxes in 2024
You will have to pay freelance taxes if you earn $400 or more from freelance work during this financial year.
Keep track of your income and expenses throughout the year
Keeping track of your income and expenses throughout the year can save you a headache when tax season comes around. When you leave it until the last minute, there is a higher likelihood that you will leave out a significant expense or income, resulting in you paying far more than you should. The best way to stay on top of your income and expenses is to have a proper filing system. Keep a record of the money you receive as soon as it's in your account. In another file, save all your expense receipts. You’ll be surprised at the difference this simple strategy can make.
Use technology to your advantage
With so many different budgeting apps readily available these days, and with so many of them being free, there’s just no excuse not to use one to track your income and expenses. One of the easiest and simplest ways to track your income and expenses is to find a business banking platform that can track your income and expenses for you, and automatically set them aside.
For example, the Novo Reserves system allows you to allocate your business income automatically, including setting aside funds for tax season. This ensures that you aren’t in for a surprise when you file each quarter.
Know when you can and cannot claim a tax deduction for your home office
If you work from home, you may be eligible for a tax deduction if you can show that you have a home office which is your principal place of business. You must also show that the office is being used exclusively for business and not used as a family room or for any other purpose. You may have to provide photographs, detailed descriptions, and measurements to back your claim.
Know the limit to meal deductions
Like all other taxpayers, freelancers, too, are eligible for meal deductions. There are limits, however, and it’s essential to know them so that you don’t over-indulge only to get a rude shock at the end of the year. You cannot claim deductions on every Sunday breakfast you have at McDonald's. Only dining bills that are considered business expenses are deductible. This includes meals related to entertaining, meeting with a client, or traveling overnight for business. Remember that you can only claim 50% of the total cost of the meal.
Calculating Freelance Taxes
With full-time employees, a fixed amount is deducted by your employer towards taxes every month. Because a full-time worker typically earns the same amount monthly, calculating and paying taxes is relatively straightforward.
It’s not as simple for freelancers for several reasons. For one thing, freelancers receive money from several different sources. Secondly, they rarely earn the same amount every month. A freelancer’s income varies from one month to the next. These factors make the calculation quite complicated, with much room for error. Making a mistake could cost you a considerable amount by paying excess taxes.
Another area where many freelancers make mistakes concerns deductions. If you are a freelancer, you can claim deductions for all expenses necessary for operating your business. This includes the cost of computer equipment and software, home office rent, advertising and marketing, travel and business meals, and office supplies.
Should You Hire A Professional To File Your Tax Returns For 2024?
Unless you are 100% sure you know what you’re doing, it’s worth hiring a tax professional to help file your returns. Tax professionals are experts in this field. They will take the time to understand your unique circumstances and ensure you get the full benefits of the tax deductions you are eligible for in 2024. This can make a significant difference in lowering the tax you pay. The critical thing to remember is that a tax professional can calculate your tax returns accurately only if you have all the necessary information handy.
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