This chart shows the expected employment growth in the various occupations from 2022-2032.
Note: Projected employment growth is for all workers in an occupation, not only for those who are self-employed.
Source: U.S. Bureau of Labor Statistics, Office of Occupational Statistics and Employment Projections
Whether you have just started a side hustle or have been freelancing for years, filing taxes can present challenges. Here are some points to keep in mind.
As a freelancer, you can set up your business as a sole proprietor or a Limited Liability Company (LLC). An LLC can be taxed as a sole proprietorship or as a corporation.
If you’re new to freelancing, you might be surprised to learn that you’re on the hook for both the employee and employer share of FICA taxes. FICA tax equals 15.3% of income — 12.4% for Social Security and 2.9% for Medicare. If your income is greater than $200,000 ($250,000 married filing jointly/$125,000 filing separately), an additional Medicare tax of 0.9% applies.
Freelancers, small business owners, and independent contractors generally must make quarterly estimated tax payments to the IRS to avoid being subject to an underpayment penalty.
Once the total exceeds $600, you will receive a 1099-K for any transaction settled through third-party payment networks (credit cards, debit cards, etc.). The amount doesn’t have to come from a single transaction.
Self-employed individuals can reduce the amount of taxes they owe by contributing to a qualified retirement plan. A SEP (Simplified Employee Pension Plan) has a high contribution limit — 25% of net earnings, up to $69,000 for 2024.
A SIMPLE (Savings Incentive Match Plan for Employees) IRA allows you to put all your net earnings from self-employment into the plan, up to a total of $16,000 or $19,500 if 50 or over.
You may deduct what you spend on: continuing education, vehicle expenses, home office expenses, internet and phone service, travel to business meetings and conferences, and interest on business loans.
Sean and Caelin are talented artists who recently launched a freelance creative services business to see if being self-employed full-time could be an option. Sean is keeping the books, and so far, so good. But he sought professional advice to help avoid errors.
During their initial meeting, their CPA shared some systems and processes for Sean and Caelin to implement:
Now, they’re also all set with a professional to do their first tax return.
Client Profile is based on a hypothetical situation. The solutions discussed may or may not be appropriate for you.
Before you take your first step into the world of entrepreneurship, there’s a checklist of things you’ll need to do to avoid tax problems while you’re starting.
Depending on how your business is structured and whether or not you have employees, you may need a federal employer identification number. This unique nine-digit number works like a Social Security number for your company.
Businesses with employees need one. Sole proprietorships generally don’t need one, but other corporate structures with more than one owner need one too. It’s free, and you can apply online with the IRS.
Most self-employed taxpayers will need to make quarterly estimated tax payments. This might be a new concept for anyone that’s had a W-2 job where tax was withheld from your paycheck.
Being self-employed means that you’re responsible for paying quarterly tax payments. You must pay tax as you earn income, not at the end of the year in a lump payment. Doing that may cause you to incur penalties for failing to pay on time.
Your tax professional can help calculate how much you need to pay each quarter and help ensure that you don’t have a big tax bill next April because you grossly underpayed.
If you’ve always been an employee, you might not be aware of the self-employment tax. This is a 15.3% tax most entrepreneurs pay on their company’s earnings. It represents the employer and employee portion of Social Security and Medicare taxes. However, you’ll receive a tax credit of 7.65% for the employer’s share when you file your annual tax return.
There are ways to avoid paying self-employment tax on all of your business profits. One option is to have your company taxed as an S-Corp. But be careful, because S-Corps come with other administrative and legal requirements. It’s best to speak with your tax professional to determine what business structure makes sense for you and your business.