Monday Jan 30, 2023

Almost All Freelancers Are Overpaying Taxes. Are You? – Business News Daily

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  • All freelancers must pay federal income tax and FICA tax. Some freelancers must pay additional state and local taxes. Freelancers must pay taxes quarterly to avoid penalties.
  • Freelancers can claim deductions, including for office rent and utilities, travel and transportation, insurance premiums and office supplies.
  • An invoicing system, finance spreadsheets, and accounting and tax software can help you track earnings and deductions, and thus lower your tax burden.
  • This article is for freelancers who want to lower their tax burden.

Most freelancers overpay their taxes, which can severely disrupt cash flow. Are you? According to the freelance tax platform FlyFin AI, freelancers overpay their annual taxes by an average of $3,000. This overpayment often stems from not properly tracking one’s freelance business expenses and not knowing which expenses to deduct. To help you avoid overpaying taxes and other common tax mistakes, we spoke with freelancers and accountants about how to track expenses, maximize deductions and avoid tax surprises. 

What taxes must all freelancers pay?

Freelancers must pay the following taxes no matter their location:

1. Federal income tax

All freelancers must pay federal income taxes. Your tax rate will vary based on your income bracket. These brackets differ for single filers, joint filers and heads of household. Below are the 2022 federal income tax rates for single filers based on income.

  • $0 to $10,275: 10%
  • $10,275 to $41,775: 12%
  • $41,775 to $89,075: 22%
  • $89,075 to $170,050: 24%
  • $170,050 to $215,950: 32%
  • $215,950 to $539,900: 35%
  • $539,900 or more: 37%

Notably, each portion of your income is taxed at the above rates. For example, if you earn $75,000 in 2022 as a freelancer, you’ll pay 10% on the first $10,275 of your income. You’ll then pay 12% on the next $41,775 minus that first $10,275, which would be $31,500 of your income. After that, you’ll pay 22% on the remaining $75,000 minus the $41,775, which equals $33,225 of your income. That means your federal tax liability would equal $12,117. 

Here’s a look at how it breaks down in a mathematical equation:

(0.1 * $10,275) + (0.12 * $31,500) + (0.22 * $33,225) = $12,117

2. FICA taxes

FICA taxes are contributions to the federal Medicare and Social Security programs. Employers pay a Social Security tax rate of 6.2% and a Medicare tax rate of 1.45%, as do employees. However, as a freelancer, you are both the employer and the employee. That effectively doubles your FICA tax rate to 2 * (6.2% + 1.45%) = 15.3%. This is a major reason freelancers typically pay higher taxes than employees.

The need to pay FICA taxes on top of federal income taxes “surprises, I would say, the majority of new freelancers,” said Logan Allec, a CPA and owner of tax relief company Choice Tax Relief. “If you make at least $400 in self-employment income, you’ve got to file a tax return and pay the self-employment tax.”

As a single-filer freelancer, you must pay 12.4% in Social Security taxes on the first $147,000 of your self-employment earnings and 2.9% in Medicare taxes on the first $200,000 of your self-employment earnings. This rate increases to 3.8% for any earnings above this amount.

What taxes must only some freelancers pay?

You might pay the following additional taxes based on where you live:

1. State income tax

Forty-one states charge their own income taxes. The nine states that don’t charge income tax are Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming. If you file …….

Source: https://www.businessnewsdaily.com/tax/freelancers-overpay

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