Updated: Aug 27, 2020
Being freelancers, dealing with taxes is probably one of the most complex situations you need to handle, especially if you are new to it. Since you are self-employed, you need to file taxes as business owners. So for every dollar you earn, you need to put aside a certain amount for tax payments, and it is a challenge to decide how much for most freelancers.
What is the Self-Employment Tax?
Self-employment tax is a tax consisting of Social Security and Medicare taxes for self-employed individuals. For W2 employees, these taxes are handled by their employers. That is why you need to pay for it by yourself as being your boss. IRS requires you to pay 15.3% Self-employment Tax, which is a combination of Social Security and Medicare taxes. This rate hasn't changed in recent years. However, other conditions may change your self-employment tax.
For example, if you also have an income from W2 employment or other partnerships, you will only pay self-employment tax for the total amount of your self-employment business income and other employment income that exceeds $132K. (Figure for 2019.)
Most freelancers usually set 30% of their earnings aside to stay safe on the tax debt. Lunafi calculates a more accurate estimation for all your earnings based on your tax profile and helps you manage your cash flow more smartly.
The total amount of your business expenses directly affects your total business income. The more you are on top of your expenses and know what you can write-off, the less you will have a business income, so the less you will pay for self-employment tax. There are likely a lot of business expenses that you can write off, like business meals with your clients, a portion of your rent if you are working home office, or software subscriptions. Not everything is a write-off, though. If you are paying for your health insurance, that is not a business expense. It is still a deduction from your income tax.
As a freelancer, you are still subject to pay income tax. To figure out what you are going to pay for income tax is more complicated than calculating the self-employment tax. Your filing status is an essential factor. It determines the tax brackets your total income will fall in and the standard deduction amount. (Unless you are itemizing deductions for your income tax.)
There are a couple of more adjustments that you can make to your income. If you have an HSA (Health Savings Accounts) plan, you can deduct it, like your self-employment health insurance. If you have an IRA or one of SEP or Simple retirement plans, you can deduct the amount you contribute to those plans too. For last but not the least, your business income and the self-employment tax you pay also counts as deductions to your income tax with defined percentages.
We are building Lunafi to help you take the most pain out of tax operations by:
Calculating your estimated owed tax as accurate as possible, so you don't have to make guesswork. Helping you keep your business expenses in order. Finding out new items that you can write-off.
If you want to see an estimation of what you will pay for this year's taxes, use our tax calculator.