Freelancers, like any self-employed workers, are required to pay self-employment tax. It includes Social Security and Medicare taxes, and it's up to you to determine the amount that you owe. In 2021, gig workers such as freelancers are eligible for pandemic relief benefits if they were unemployed in 2021. In this post we'll lay out the options freelancers have for COVID-19 relief and the steps to calculating tax payments owed.
The Social Security tax rate is 12.4% and the Medicare tax rate is 2.9%. With these combined, the current rate of the self-employment tax is 15.3%. This rate is applied to your net earnings for 2020, before you account for any overhead spending related to your self-employment. If you made more than $200,000 in 2020 through self-employment, you owe an additional 0.9% in Medicare tax, so your 2021 tax rate would actually be 16.2% [source].
Freelancers and other gig workers are required to pay self-employment tax in 2021 if they made more than $400 in net earnings from self-employment in 2020. There is no exception to paying self-employment tax—freelancers, like all people in the workforce, must contribute to the national fun for Social Security and Medicare benefits.
A deduction is an expense eligible to be subtracted from your net earnings to reduce the total amount subject to tax.
Business expenses and fees that factor into your freelancing work can be deducted from the amount you owe in self-employment tax. Here are some examples of business expenses that may apply to you:
Hardware you purchased to complete your work, such as a printer or a keyboard, can be deducted from your self-employment tax. If you purchased a more pricy piece of hardware such as a new computer or a digital drawing tablet for your graphic design work, you can typically get a depreciated amount credited back to you for the purchase.
Software and cloud-based subscriptions you use for your work, like an Adobe Creative Cloud plan or Microsoft Office 365, are generally eligible for deduction.
Office expenses such as your desk, chair, printer paper, and ink, are eligible for deduction if they were purchased in 2020.
Since it's up to you to provide your own health insurance, any health insurance premiums you paid in 2020 can be written off your 2021 self-employment tax.
If you're a freelancer, you surely use your Internet to facilitate your work and communications. You may also talk with clients using a phone. These expenses from 2020 can be written off what you owe.
Transaction fees on invoices can easily be added up once you identify the rate your invoicing software takes out of your earnings. For example, PayPal's transaction fee is 2.9%. If you received your payments via PayPal invoices throughout 2020, you can simply claim 2.9% of your earnings as a deductible.
If you were directly affected by COVID-19 in 2020 because you or a close relative was ill with the virus, the IRS is providing relief credits that can help reduce the tax you owe. You have the option to claim sick and/or family leave, under the Families First Coronavirus Response Act. To claim your eligibility, file IRS Form 7202.
To determine what you owe, look through your payment receipt records and add up the total you earned from January 1st, 2020 to December 31st, 2020. Remember to include only the income from sources of self-employment. Add up your deductible business expenses, such as transaction fees and the software you use. Subtract the expenses from your earnings to obtain your net profit.
Finally, apply the 15.3% tax rate by multiplying your net profit by 0.153. This number will reflect the amount you owe for the 2021 self-employment tax.
Once you've calculated your deductions and determined once you owe, it's time to pay your taxes. You'll need to file a Schedule SE (Form 1040) form, available on the International Revenue Services (IRS) website. Keep in mind that your dollar amounts will be looked at by the IRS as an estimation and the final calculations may be different from your expectations.
If this all sounds too complicated, or you'd rather spend your time on work instead of doing your taxes, you can always hire a tax consultant to help you with the dirty details and paperwork.
%20Large.jpeg)
