How Do Taxes Work For Self-employed Individuals Or Freelancers?

Understanding Taxes for Self-Employed Individuals

Self-employed individuals or freelancers handle taxes differently than traditional employees, being accountable for income tax and self-employment tax, covering Social Security and Medicare, on their earnings.

1. Reporting Income: Self-employed individuals or freelancers must accurately report all business income on their tax return, maintaining meticulous records of earnings from freelance, contracting, or consulting work.

2. Estimated Taxes: Self-employed individuals must make quarterly estimated tax payments covering income and self-employment tax, as they don't have taxes withheld from paychecks like traditional employees.

3. Self-Employment Tax: Self-employed individuals must pay the self-employment tax, covering Social Security and Medicare taxes, at a rate of 15.3% on their net earnings up to $147,000, encompassing both the employee and employer portions.

4. Deductible Expenses: Self-employed individuals can reduce their tax liability by deducting various business expenses, such as home office costs, travel expenses, and retirement contributions, from their taxable income.

5. Tax Forms: Self-employed individuals in the U.S. report their business income and expenses on Schedule C of their tax return and must file Schedule SE to calculate self-employment tax if their earnings exceed $400.

6. Additional Considerations: Self-employed individuals can take advantage of tax deductions and credits tailored to their situation, like the Qualified Business Income Deduction (QBI) and the Self-Employed Health Insurance Deduction.