In 2014, the United States had around 53 million freelancers. By 2020, this number rose to 59 million.
Post-pandemic job cuts have nudged more people to become freelancers, independent contractors, or the sole proprietors of small businesses. More professionals are also investing in their side hustles and eventually turning it into a core business.
Considered as self-employed, individuals falling under these categories will need to file Form 1099-MISC. To find out how much money you can make after taxes, follow this useful guide for calculating your self-employment taxes.
As an employee, your company typically takes out a percentage of your paycheck for the taxes owed by you and pays it directly to the Internal Revenue Service (IRS). These taxes go towards Social Security, disability insurance, and Medicare.
But if you are a self-employed individual, there is no scope for paycheck withholding - you are expected to pay these taxes on your own.
If you make over $400 a year or have a church employee income of $108.28 or more, you must pay income as well as self-employment tax. For this, you need a Social Security number (SSN) or an individual taxpayer identification number (ITIN).
As a freelancer, you may be wondering how much you should set aside for 1099 taxes. Essentially, you should save up to 30% of your earnings to cover both income tax and self-employment taxes every quarter.
The self-employment rate, taxed at 15.3%, includes 12.4% for Social Security and 2.9% for Medicare or hospital insurance.
For 2021, Social Security tax only applies to the first $142,800 of your collective income from self-employment and paycheck. Beyond that, no extra tax is charged.
However, there is no limit for self-employment tax on Medicare. No matter how much you earn, Medicare tax will be charged on collective wages and self-employment income.
You can make estimated tax payments via the Electronic Federal Tax Payment System (EFTPS). These are due on April 15, June 15, September 15, and January 15 of the following financial year.
The amount of self-employment tax you pay depends on a couple of factors.
The first step is to understand how much you have earned. Then, you can calculate your net earnings by subtracting your business expenses from your revenue. Typically, 92.35% of your net earnings from self-employment are subject to self-employment tax.
Let's look at a few examples to figure out how self-employment taxes can be calculated:
Michelle runs her own microblading salon in Los Angeles, California. Her business generates roughly $120,000 per year.
Michelle won't be paying taxes on this entire amount, only 92.35% of it. Thus, she must multiply her net earnings by 0.9235. Her taxable income would then be:
120,000 x 0.9235 = $110,820
Since self-employment is taxed at 15.3%, Michelle should now multiply her taxable income by 0.153.
110,820 x 0.153 = $16,955.46
This final amount is what Michelle needs to set aside for self-employment taxes.
Cindy is a Seattle-based costume designer whose income is $155,000. Her taxable income would be:
155,000 x 0.9235 = $143,142.5
But unlike the previous example, there is an extra step. This is the amount on which Medicare will be taxed at 2.9%. Cindy's Medicare taxes would be:
143,142.5 x 0.029 = $4,151.13
Social Security will be taxed only on $142,800 at the rate of 12.4%. This amount would be:
142,800 x 0.124 = $17,707
To calculate her total self-employment tax, Cindy must add her Medicare and Social Security taxes:
If your net earnings from self-employment exceed a certain figure, then an additional 0.9% Medicare tax may apply, as follows:
It can be a little overwhelming to calculate your taxes, especially if you switched more recently into a freelance role. However, with the support of tax calculators and professional bookkeeping support like Fincent, you can get these answers with ease.
If you have a side hustle along with a day job, your self-employment taxes may vary.
Say you have a full-time job as a software developer, and on weekends moonlight as an online coding teacher. You make $150,000 on the job and $20,000 per year as a coding instructor.
Your employer will withhold Social Security taxes on $142,800 of your wages. Since your paycheck exceeds this amount, you don't owe any more taxes on Social Security.
However, you'll need to pay 2.9% in Medicare taxes on the money earned minus expenses on your side hustle.
Here's a quick guide on how to pay taxes on 1099 income:
Oftentimes, the taxes we pay increase due to a lack of organization and access to the right information. But you can reduce your self-employment taxes with these best practices:
As a self-employed individual, you incur several expenses along the way. The good news is that there are several tax deductions that can lower your taxable income and increase profits.
Here are some of the key business expense heads to consider when calculating your taxable earnings:
You can also claim deductions on phone and internet bills, travel, interest on a business loan, publications and subscriptions, advertising and marketing, and retirement plan contributions.
Understanding the basics of self-employment and paying your taxes on time will help you run a more efficient business - not to mention maximize your profit margins.
However, you may prefer to outsource this process and focus your time and energy on the business itself. Fincent, a professional bookkeeping service that caters to small, creative partnerships, is here to support you!
Find out how we take care of all your bookkeeping needs so you are free to grow your business.
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