U.S. Freelancers: The Tax Man Is Coming
Let me begin by saying that I am not an accountant, nor do I play one on TV. My number one piece of advice is to talk with an actual accountant who can speak into your exact situation and help you figure out exactly what you need to do right now.
Now. About taxes.
If this is your first year freelancing, you may not have thought about the fact that Uncle Sam still needs his piece of your tasty income-pie. I spent years working in a large company's payroll tax department, and I’ve filed payroll taxes in all fifty states. So, though I’m not an accountant, I have a little bit of knowledge in this area.
When you work for an employer, they withhold taxes from your check. They withhold Social Security, Medicare, state income tax, federal income tax, and possibly local income tax if you live in an area with it (looking at you, Pennsylvania!).
Your employer sends those amounts to the government on your behalf. At the end of the year you do a tax return to figure out if what they sent was the right amount, and you either pay a bit more if they didn’t withhold enough or get a refund if they withheld too much.
If you’re freelancing, there’s no one to withhold or send the money for you.
That doesn’t mean you don’t have to pay! It just means that when you get that check from a client, it’s not nearly as big as it looks.
As an employee, everyone pays a tax of 6.2% for Social Security. What you might not know is that your employer matches your contribution. This amount isn’t withheld from your check, but it’s a cost of having employees.
As a self-employed individual, you get the joy of paying both the employer and the employee portion of Social Security. That alone amounts to 12.4% of your income! The good news is that you only have to pay the tax on the first $137,000 you earn, at least in 2020.
The Medicare tax rate is 1.45%. And, again, employers match this amount; if you’re self-employed, congratulations on paying both parts of this tax. Take another 2.9% off of your…