Paying Taxes as a Freelance Transcriptionist

If you’ve worked as an employee, you understand that what you get in your paycheck is generally much less than what you simply made. Why? Because your organization withheld cash for Social Security, Medicare, and income tax and despatched that cash to the government.

When you’re self-employed, the total burden for paying employment taxes and prepaying predicted income tax legal responsibility is left to you. The government needs you to make bills of your predicted charges during the year in quarterly installments. If you don’t, you’ll be an issue to underpayment consequences.

The Self-Employment Tax

So, you’ve begun taking on more clients or decided to freelance and freed yourself from the everyday grind of the 9 to 5. But there’s no freedom from paying taxes. In truth, you’ll owe a whole new tax, which you by no means needed to pay as an employee. The self-employment tax (officially known as the SECA tax for Self-Employment Contributions Act tax) is the self-hired character’s model of the FICA (Federal Insurance Contributions Act) tax paid by using employers and personnel for Social Security and Medicare, and it’s due for your internet income from self-employment.

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What is the self-employment tax?

Many newly self-employed—sole proprietors, independent contractors, and the like—are surprised at their tax payments on the quit of the year. They discover they’re paying a lot more in taxes as a freelancer than as an employee. That’s due to the fact they’re carrying the entire burden of paying their Social Security and Medicare taxes.

When you are an employee, you lump that value together with your organization, with every one of you paying a percentage of the FICA tax. When you’re self-hired, although, you are caught with the entire full quantity yourself.

The tax is divided into elements:

12.4% for Social Security.

For 2019, this a part of the tax applies to the first $132,900 of income. If you earn more than that, then the 12.4 percentage a part of the charge that pays for Social Security stops for the year.

2.9% for Medicare.

The Medicare portion of the self-employment tax doesn’t stop. No matter how a lot you earn, you’ll pay the 2.9% Medicare tax. For more statistics in this tax, see IRS Tax Topic 554: The Self-Employment Tax.

So how does the Self-Employment Tax Work?

When you start freelancing, you record the outcomes of your operations on Schedule C and report it together with your Form 1040. You calculate your self-employment tax on Schedule SE and report that amount in the “Other Taxes” segment of Form 1040. In this way, the IRS differentiates the SE tax from the earnings tax.

When figuring self-employment tax you owe, you get to lessen self-employment profits via half of the self-employment tax before making use of the tax rate. Say, for example, that your net self-employment income is $50,000. That’s the amount you report as taxable for income tax purposes on Form 1040.

But when figuring your self-employment tax on Schedule SE, Computation of Social Security Self-Employment Tax, the taxable amount is $46,175. Three percent tax on $3,825 difference, in this case, saves you $585.

You can declare 50% of what you pay in self-employment tax as an earnings tax deduction. For example, a $1,000 self-employment tax charge reduces taxable profits to $500. In the 25 percent tax bracket, that saves you $125 in income taxes. This deduction is an adjustment to earnings claimed on Form 1040 and is to be had whether or not you itemize deductions.

For example:

You run a catering commercial enterprise as a sole proprietor.

In 2019 your net profit on Schedule C is $35,000.
Your internet income as calculated on Form SE might be $32,323 ($35,000 x 0.9235).
Your self-employment tax might be $4,945 ($32,323 x 0.15), and you will report that quantity on Form 1040 within the “Other Taxes” segment.
Then you’ll record half of your self-employment tax, $2,473, ($4,945 X .50) on Form 1040 as an adjustment to earnings. That will reduce your Adjusted Gross Income and the amount of income tax you owe.

Maximize Your Deductions

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A benefit to being a freelancer is you get to write off a lot of things that you wouldn’t normally get to write off on your taxes. Keep a good record of everything you buy that’s even remotely business-related.

Some common deductions include:

Travel and Hotel

So, you can’t deduct your vacation. But you can track your mileage and when you’re on your way to buy new paper for your home office. Or the travel involved in meeting a client in person. Or the mileage to get to the coffee shop you like to work in. As long as it’s business-related, you can use it as a deduction. Be sure to keep a written log so you can track where you were going and why.

Home Office

If you’re a serious freelance transcriptionist, you are going to have a home office. And yes, it’s tax-deductible. In order to qualify, this area or room has to be specifically for working only, and it’s value can be calculated in a few different ways.

Utilities

Portions of your internet bill, the electric bill, heating, and even your water bill can all become deductions. Just how big depends on how you calculate your home office space. In general, it’s proportionate to the space that you use as your home office.

Advertising and Marketing

Those business cards and flyers you had printed up, that’s right. Tax-deductible.

Your Website

Your website can be the most vital part of a freelance transcriptionist success when prospecting clients. Your face to the world wide web is definitely tax-deductible.

Computers, Software, and Office Equipment

If you need it to work, it’s tax-deductible. That ergonomic chair you got for your back, go ahead and write it off. Your copies of ExpressScribe or FTW Transcriber are definitely write-offs as well, along with your Grammarly subscription.

Make Tax Time a Little Less Troubling

Tax time can get a little frantic, especially if you’re not the type to keep your receipts in a shoebox. Luckily there are a few handy tools, which also happen to be tax write-offs, to help out.

Quickbooks Self-Employed

Quickbooks will link up to your bank account and help you categorize your spending into business expenses, and help categorize those so you’ll be able to easily deduct them from your taxes. It will help you calculate your estimated tax payments. And because it’s an Inuit product, it will help you transfer all this information over if you use TurboTax to file your taxes when the time comes. It can also track your mileage and is just a great all-around tool to keep an eye on your income and expenses.

Set Up a Tax Savings Account

Get your self a savings account so that when it comes time to pay Uncle Sam, you’ll have the money stashed away. There are a few that automatically take a percentage out of each check. I’ve used Catch, and it’s great because it also gives you the option to save for things like days off and retirement.

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Lauren

Lauren

Lauren is a work from home Transcriptionist and loves the freedom freelancing brings her. She is currently learning about web design and graphic design and hopes to branch out into branding/brand management. In her free time, she makes her own jewelry.

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