Kids, this comes from the New York Times so is presumably pretty legit. In “Tax Tips for Those Who Make Money in the Gig Economy,” from the March 4 Sunday Business section, Tara Siegel Bernard lays it out: self-employment taxes, expenses and deductions, estimated tax payments, health insurance. A great starting point for new freelancers.
From Cathy Keeps Books’s point of view, the most important thing to know about self-employment is you’re going to pay a lot of taxes. Or, at any rate, more than you’ll want to believe when you’re just starting out. You know how when you’re working for the man, a chunk of your paycheck is taken out for taxes? That deduction probably includes:
- FICA (Federal Insurance Contributions Act). This comprises Social Security, at 6.2% of your wages, and Medicare, at 1.45%.
- Your federal income tax.
- Your state income tax.
Meanwhile, your employer pays their share of FICA, which is usually equal to yours (barring tax-relief legislation for workers, or what not). When you’re working for yourself, what happens to that chunk of your paycheck? Well, you don’t get a paycheck, so no chunk gets taken out. That means you have to pay your own FICA, federal and state income tax out of whatever you’ve earned. Moreover, you have to pay employer’s FICA, too, because you’re your own employer. And in a special twist, because you’re not contributing taxes every time you get a check, you have to pay estimated taxes on a quarterly basis.
In short, freelancing is totally awesome, but do your tax research before you start out and avoid getting into trouble later.