There are two main types of tax to worry about when freelancing; income tax and self-employment tax. The former scales according to how much you earn in a given period, while the latter is fixed at 15.3% of your income, and is used to pay into both Social Security and Medicare schemes, in much the same way as your employer would do if you worked for a separate business rather than for yourself.
How to file your self-employment taxes
When reporting your earnings from self-employed activities, you’ll need to report this as 1099 income. That’s just the code which the IRS applies to this part of the process, and will help with working out how much you owe in 1099 tax.
In terms of actually filing your tax return as a freelancer, and paying the bill that you receive based on your income, there are a few ways to go about it.
You could do everything yourself, and use the official online portal to submit returns. You could outsource this to an accountant, giving them the responsibility for sifting through your paperwork in your stead. You could use accounting software to automate a lot of this, and even to complete the return submission process as well.
Whichever route you take, you’ll need to be timely with your filing, or else face penalties for late submission and underpayment of taxes.
Including expenses & other deductibles
While freelancer designers are required to pay income tax like anyone else, they are also able to make use of deductibles in order to limit their liability to a greater extent than most people who have a separate employer.
Essentially, costs you incur in the line of running your business can be deducted from what you owe, with the idea being that this will encourage you to invest in and grow your freelance operations, rather than being hamstrung by a big tax bill.
All sorts of expenses can be deducted in this context, and the most common examples are the use of a vehicle for business purposes, as well as the purchasing of equipment and materials used in your line of work.
If you work from home, you can also deduct certain costs that come from setting up an office and spending a certain proportion of the day in it. This includes things like utility bills and rent or mortgage payments, although it has to be proportional and accurate; you can’t write off your entire electricity bill if you only work from home for eight hours a day, five days a week for example.
The best way to orchestrate all of this aspect of paying tax as a freelance designer is to keep rigorous records of your income as well as your expenses, and supply this as evidence to support your tax return when you file it. An accountant can also assist with limiting your tax liability, and improving the efficiency of your filing techniques.
Getting to grips with how tax might impact your rates
Another point to make when it comes to paying tax as a freelance designer is that you need to be aware of how what you charge clients will hold sway over the amount you owe, and the amount of disposable income you have as a result.
Obviously you need to save enough money from each invoice that gets paid so you can cover your tax bill. You’ll also need to pay estimated taxes quarterly, in anticipation of these aligning with your next return.
You need to strike a balance between what you are worth, what clients can afford, and what your income will mean from a tax perspective. It’s all part of the high wire act that is living life as a self-employed person!