Unlike W-2 employees, self-employed individuals don’t get their taxes deducted from their paychecks. Freelancers have to keep track of what they owe and pay it on time without help from their employers, so it’s essential that you understand the basics of filing your taxes.

What to Know About Your Self-Employed Tax Obligations

When you make the switch from employee to an independent contractor, figuring out your new tax obligations can lead you down a confusing road. In this article, we’ll offer you some clarity.

1. Always Consider Your Taxes When Creating an Invoice

It’s a common trope that freelancers don’t know how to price their services when they’re starting out. While it’s important to consider your cost of living and business expenses when drafting invoices, you can’t forget about your tax burden because your clients won’t pay it for you.

The American tax system bumps up 8-10% when your individual income reaches $40,525 to $54,200 and $164,900 to $164,925. If you can’t exceed these amounts without going over significantly, you could price your business out of the market and lose your competitive edge.

2. You’ll Need to Pay FICA Taxes: Social Security and Medicare

If you’re an independent contractor, a sole proprietor, or a single-member LLC, you’re required to pay both the employer and employee Social Security (12.4%), Medicare (2.9%), and Medicare surtax (0.9%). This collection of taxes is known as the self-employment tax burden.

In 2022, self-employed workers have to pay a total of 15.3% in FICA taxes or 16.2% if they make more than $200,000 per year filing individually or $250,000 if filing jointly.

At the end of the year, self-employed individuals will pay the 15.3% to 16.2% tax rate. However, you may be able to claim 50% of your self-employment taxes paid as deductions.

3. Take Advantage Of Your Deductions Every Single Year

Over 15 million Americans are self-employed, but most of them won’t be paying the 15.3% to 16.2% tax rate thanks to deductions. There are several ways to save on taxes, including:

  • Business-Based Vehicle Mileage
  • Social Security and Medicare Taxes
  • Business Meals and Travel
  • Internet and Phone Expenses
  • Health Insurance Premiums
  • Publications and Subscriptions
  • Home Office Expenses
  • Business Credit Card/Loan Interest
  • Education (Business Related)
  • Advertising and Startup Costs
  • Business Insurance
  • Retirement Plan Contributions

Your internet, phone, home office, and vehicle mileage expenses aren’t 100% deductible, but you may be able to knock off 50% to 80% of your total tax burden. To make tax filing less difficult, record your income, deductions, and Profit and Loss statements each month.

4. You’ll Need the 1099-NEC and Form 1040 to File Your Taxes

To file your self-employment taxes, your payers or employers need to issue a 1099-NEC to you and the IRS. You should receive this document in the mail or online via email by the beginning of February, but you won’t need to send the 1099-NEC to the IRS when you file.

The 1099-NEC is used as proof of income. The IRS will use your 1099-NEC to see if the income listed on your Form 1040 matches exactly. If there’s some discrepancy, the IRS may audit you.

5. Filing Your Self-Employment Taxes Takes A Lot of Time

As an employee, filing your taxes is pretty easy, but freelancers have to take the time to reconcile their accounts by themselves or with an accountant. What’s more, freelancers have to save 25-30% of their income to give themselves enough wiggle room to pay their taxes.

If you’re behind on filing your taxes, you should start the bookkeeping process as soon as possible. Start using spreadsheets and/or software to store your tax information.