There are many benefits to freelancing, including working from home, choosing your own hours, and carefully considering who you’d like to work with. But there are also a few things you need to think about if you’re working on going freelance this year. Not only will you need to do your own taxes, but you’ll also need to understand the legalities of this type of work.
Many freelancers begin their life as a freelancer as a sole proprietorship. This basically means that there’s no difference between you and your company. You control all of the profits and assets and report them on your tax return. This also means that you’re 100% responsible for any debt or other liabilities. There’s no safety net in the event that you get sued.
For example, even freelance writers must be careful when operating as a sole proprietor. That’s because if you accidentally plagiarize someone else or write something someone doesn’t like, they could go after your personal assets.
If you’ve had trouble with clients paying late in the past, operating under an established company and name can help you feel more secure and confident when it comes to chasing after those payments. And if you’re worried about tax, LLCs and sole proprietors are taxed similarly, and while you’ll have to pay some setup costs, you won’t need to worry about tax implications.
Speaking of tax, when you’re self-employed you need to pay both income tax and self-employment tax. Self-employment tax covers you for Medicare and Social Security. At tax time, you’ll determine how much you need to pay in tax by figuring out your net loss or net profit for the year. This is a simple calculation and you’ll just take your business income and subtract your business expenses.
You’ll need to file a Schedule C. If you think you’ll owe more than $1000 in SE taxes, you should be making estimated tax payments quarterly. The good news? You’ll also be able to deduct a number of expenses. These include vehicle expenses if you travel for work, a home office deduction, office equipment and supplies, Medicare and social security taxes, and health insurance premiums.
Are you just beginning your freelance career? Have you encountered any of the above? Leave a comment below and let me know.