Freelancers are self-employed as either independent contractors or sole proprietors. As a result, if you’re a freelancer, you face a double whammy – having to pay income tax as well as self-employment tax.
Most people know what income tax is, but what is self-employment tax? Basically, it’s a tax that makes up for the employer’s portion of Social Security and Medicare tax. Although individuals pay their own Social Security and Medicare taxes, businesses pay them on each employee, too. Self-employment tax, 13.3 percent of the first $106,800 of a self-employed person’s income, covers what a business would pay in Social Security and Medicare tax if it hired that person as an employee.
As a freelancer, you can lessen the bite of both taxes with some tax planning. You can reduce self-employment tax with any business-related expense. For example, if you paid for materials, supplies, insurance or postage during the year, these expenses are deductible. You can also deduct lodging and transportation associated with generating your self-employment income.
You can also take steps to reduce your income tax liability. Unlike other employees, the cost of your health insurance is tax-deductible. And, you can deduct the money that you invest in a traditional IRA (up to $5,000 per year).
Proper tax planning can help you avoid some of the tax double whammy. If you’re a freelancer, contact your tax professional to learn about specific tax planning strategies you can use to limit your tax burdens.
This article was originally published in Illuminations: Facts & Figures from people with a brighter way, a Rea & Associates enewsletter, 7/18/2012.
Note: This content is accurate as of the date published above and is subject to change. Please seek professional advice before acting on any matter contained in this article.