The Reality of Freelance Taxes: What No One Tells You
TL;DR
Transitioning to freelance work means a rude awakening come tax season. Learn how to estimate, set aside, and survive self-employment taxes.
The W-2 Illusion
When you work a traditional job, your employer quietly handles the messy parts of taxes. They withhold your income tax and pay half of your Medicare and Social Security taxes. When you freelance, you become the employer and the employee.
Understanding Self-Employment Tax
Self-employment tax is currently 15.3%. That covers Social Security and Medicare. This is in addition to your standard income tax bracket. If you earn $50,000 freelancing, you owe $7,650 just for the privilege of being self-employed, before federal and state income taxes apply.
The 30% Rule
As a baseline, set aside 30% of every payment you receive into a separate, dedicated tax savings account. Do not touch this money. It is not yours.
Quarterly Estimated Taxes
The IRS requires you to pay taxes four times a year, not just in April. Missing these deadlines results in penalties and a massive bill in the spring.
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