Everything You Need to Know About Taxes as Employee

As a freelancer or a self-employed individual, your take-home pay may be significantly more than if you were working for a corporation. Not only are taxes not taken out, but also you don’t have a company directly deducting health care, 401k or other financial costs from your paycheck. This can lead to a temptation to spend it all, but self-employed professionals shouldn’t be fooled into thinking they actually have the full amount of their check. Taxes are required regardless of how you are employed. “Business owners, whether they are self-employed freelancers or corporation owners, are responsible for complying with tax law with respect to their business,” said Shoshana Deutschkron, VP of communications at freelance job platform Upwork. “Financial literacy is a critical skill, [and] that literacy includes an understanding of taxation.”

“You need to hold onto some of your money,” added Lisa Greene-Lewis, CPA and TurboTax tax expert. “You should pretend you don’t have that much money because your income varies so often. You have to think about paying your taxes.” Not only are government forms daunting, but learning the ropes of taxation can be truly complicated to understand. Those embarking on a self-employed career should take into consideration the implications of how and why filing taxes correctly can impact your business If you’re filing as “self-employed” with the IRS, here are the basics of filing, paying and saving for taxes.

Freelancers must take their taxes into account when setting their pricing, consider tax burden in planning their finances for the year (e.g., saving money vs. re-investing it in the business), and track their business expenses to deduct them at the end of the year, Deutschkron said.

According to the IRS, self-employed individuals are classified as:

  • Carrying on a trade or business as a sole proprietor or an independent contractor.
  • Being the member of a partnership that carries on a trade or business.
  • Being otherwise in business for yourself (including a part-time business)

When you’re self-employed, you must pay a self-employment tax (SE tax) as well as an income tax. The SE tax is a Social Security and Medicare tax that is primarily for individuals who work for themselves. This is separate from income tax.

Before you can determine your tax obligations, you must figure out your net profit or net loss from your business. You can calculate this by subtracting business expenses from your business income. If your expenses are less than your income, the difference is net profit and becomes part of your income. However, if your expenses are more than your income, the difference is a net loss.