If you’re currently in the process of moving from a full-time job into becoming a freelancer, you’re probably experiencing changes in every aspect of your life. The way you file taxes is also changing. Instead of having taxes deducted from your income, you now must navigate paying taxes as a business owner.
Most people have the same questions about getting started on paying freelancer taxes. Here are some of the most common ones.
RELATED ARTICLE: WHY SHOULD YOU CONSIDER BEING A FREELANCER?
Do I Need to Start a Business?
No, you don’t need to formally start a business if you’re operating under your legal name and not a business name. You do, however, need to pay taxes on your income regardless of what name you trade under.
If you’re trading under a registered business name, you’ll want to register your business as a sole proprietorship.
You may even choose to incorporate your business. That’s because incorporation provides you legal protection in the event a client, supplier, or anyone else tries to sue your business. If you aren’t incorporated, your personal assets become a target. However, if you are incorporated, then your personal assets, like life insurance, are protected.
This gives a good incentive to become incorporated. Insurance policies are particularly important to a freelancer, as there is less job security. You should use services like Intelliquote to find the best policies for you and your work.
Additionally, it is easier to request an extension on your tax return when your business is incorporated. This will help you balance cash flow in your first few years.
What Is Business Income and What Do I Have to Declare?
According to the IRS, income can be received in money, property, or services.
This means that even if you’re receiving goods or services for your work, it still counts as revenue, and you still should declare it. For example, if you’re a web developer and you trade a website for free SEO marketing services, you need to declare the value of those services as income.
Additionally, you also need to declare any income you receive from renting out property, stocks, or any fringe benefits.
The bottom line is you should declare on your taxes any money or goods you receive outside of gifts.
Do I Need to Charge Sales Tax?
The answer to this question depends on the kind of business you’re running, how large the business is, what state you live in, and what state you’re selling in.
Generally, you’ll need to assess sales tax on any invoices for tangible goods. However, for those who provide services like graphic design, programming, or website development, distinguishing what can be a tangible good is often problematic.
The best course of action is to speak with an accountant who is licensed in your state, They’ll have a good interpretation of both federal tax law and the nuances of your individual state’s tax codes.
However, if you need to charge sales tax, you’ll also typically need a sales tax permit from your state, so don’t put the question off.
The Last Word
These are some of the most common questions freelancers ask. Moreover, they affect everyone who earns any additional income. Getting to know the ins and outs of these issues is key. Knowing them will make the first few years of running your business go as smoothly as possible.
Do you have any burning questions about taxes, invoices, or starting your own business?