Being a freelancer offers a lot of benefits, including freedom from commuting every day, the flexibility to manage your workday, and choosing who you sign agreement templates with or send scope of work templates to.
But like any other profession, there’s one thing that remains inevitable: paying self employment taxes. So if you’ve ever wondered, do freelancers pay taxes? The answer is yes!
How to pay taxes as a freelancer is one of the most important administrative tasks you need to learn. Nothing spoils a great year as a freelancer by finding out you owe more in taxes than you thought.
So it’s important that you know how to do taxes as a freelancer. You don’t have an employer that deducts taxes each paycheck, so you need to ensure you’re handling that responsibility.
Let’s look at 5 essentials of knowing how to pay taxes as a freelancer.
Don’t think that paying taxes as a freelancer is only for those generating a six-figure income. As soon as your business earns $400 or more in a year, freelance tax rules state that you have to pay income tax and self-employment tax.
As Bonsai's Matt Brown says: “One of the biggest surprises freelancers face comes at tax time. Because your traditional employer withholds federal, state and social security taxes for you, you usually don’t realize just how much goes towards self employment taxes (you can use our 1099 tax calculator to find out how much you'll owe). When you transition into freelancing, it is entirely up to you to pay what you owe. If you do not prepare for tax season, you could end up with a massive bill, with added fines and penalties, in April.”
It’s a good idea to start by setting aside 30 per cent of any money you earn, while you accustom yourself to how to pay for taxes as a freelancer.
That’s because whether you work for yourself or as a contractor, such as a 1099 contractor, freelance tax rules require you to pay as an employee and an employer. Sounds like you’re being double-taxed, which can come as a surprise to some, but it’s one of the freelance tax tips of which you must be aware.
Which brings us to our second tip.
Particularly when you’re just starting out, spending your hard-earned money to get someone else to help you know how to pay freelance taxes may seem like an extravagance.
An accountant, particularly one who knows freelance tax information, will be worth their weight in gold. The biggest reason is that they will know all the ins and outs of freelance work and taxes.
But it’s also because you’ll have time to do your work, rather than spending all your billable hours learning how to pay taxes as a freelancer.
You should still know tax basics for freelancers, but a quality accountant will be able to help you answer questions such as:
There are plenty of things to consider when it comes to freelance and taxes. And remember, one of the best freelance tax tips is that the professional fees you pay an accountant are tax deductible.
Once you find a qualified tax professional, you need to spend some time with them, first to make sure they know all there is to know about how to pay taxes as a freelancer.
But you also want to be sure they know about your freelance business. If you’re a designer, what are the specific rules for paying taxes as a freelancer in that line of work? Is it different if you’re a writer? Or a developer?
There may not be major differences, but when it comes time to tracking expenses and revenue, there may be some nuances in the tax basics.
Did you know that you can use Bonsai for accounting? Or that Bonsai can help you be prepared for self-employment tax by providing tax estimates, filling date reminders, and identifying your tax write-offs?
Let's see how that works. First, head to your main Bonsai dashboard and have a close look on the left side - we'll be working with the accounting and taxes sections. First click on "Accounting".
Inside the accounting section, you'll see a breakdown of your income and expenses. Both can either be automatically imported from your bank account, or manually added. Work you got paid for via Bonsai will also be registered here.
Make sure this section is properly filled in and click on "Taxes" next.
This is where the magic happens: Bonsai will do all the calculations for you, and we'll provide you with an overview of your tax estimates, a list of tax deductions you can use for the upcoming tax season, and reminders for all the upcoming filling dates.
Simple, right? If you're ready to check out Bonsai and explore all the features, go ahead and sign up for the free trial!
One of the benefits of paying taxes as a freelancer is in the write offs available to you. Your tax professional will help you sort out the entire list, but it’s important either way for you to itemize and record all your business expenses.
Things to keep track of for the purposes of write-offs include:
As a result, you need to keep good records. For instance, if your office space is in your home, you can deduct a portion of household expenses such as utilities, as long as the space is dedicated solely for business activities.
And when it comes to tax time, having those records will make your life easier. You’ll also spend less on professional fees if you’re at least somewhat organized in your record keeping.
Here’s the kicker:
It’s a good idea when it comes to freelance work and taxes to open a dedicated bank account that will make it easy to track business earnings and expenses, especially if you're using tax and accounting software such as Bonsai tax.
Another key for freelancers is to pay estimated taxes quarterly. That’s because knowing whether or not to make these payments will depend on how much money you make.
For instance, if you expect that you will owe at least $1,000 in taxes, or if you rely on freelance work for all or most of your income, you’ll likely have to make estimated tax payments every quarter.
If you don’t pay enough each quarter, you will still owe at tax time. If you pay too much, you could receive a tax refund.
The estimates will be based on projected income, and you don’t want to make a wild guess. If you don’t pay quarterly, you could be subject to a penalty. Your accountant will be able to provide you with guidance in this regard.
Administrative tasks are not the reason you became a freelancer, but they are an important part of running your business. That includes how to pay freelance taxes, which isn’t something you can ignore.
Our guide to the keys of knowing how to pay taxes as a freelancer will help ensure you’re paying attention to your responsibilities. That includes knowing how much to pay and when you need to pay it, as well as what expenses to track.
You’ll know what to answer the next time someone asks: “do freelancers pay taxes?”
To ease the stress of understanding how to pay freelance taxes, consider the option of the integrated tools available to you as part of Bonsai’s freelance suite by signing up for a free trial now: start with expense tracking, identify your tax deductions, and estimate quarterly taxes.
A verbal contract (formally called an oral contract) refers to an agreement between two parties that's made —you guessed it— verbally.
Formal contracts, like those between an employee and an employer, are typically written down. However, some professional transactions take place based on verbally agreed terms.
Freelancers are a good example of this. Often, freelancers will take on projects having agreed on the terms and payment via the phone, or an email. Unfortunately, sometimes clients don't pull through on their agreements, and hardworking freelancers can find themselves out of pocket and wondering whether a legal battle is worth all the hassle.
The main differences between written and oral contracts are that the former is signed and documented, whereas the latter is solely attributed to verbal communication.
Verbal contracts are a bit of a gray area for most people unfamiliar with contract law —which is most of us, right?— due to the fact that there's no physical evidence to support the claims made by the implemented parties.
For any contract (written or verbal) to be binding, there are four major elements which need to be in place. The crucial elements of a contract are as follows:
Therefore, an oral agreement has legal validity if all of these elements are present. However, verbal contracts can be difficult to enforce in a court of law. In the next section, we take a look at how oral agreements hold up in court.
Most business professionals are wary of entering into contracts orally because they can difficult to enforce in the face of the law.
If an oral contract is brought in front of a court of law, there is increased risk of one party (or both!) lying about the initial terms of the agreement. This is problematic for the court, as there's no unbiased way to conclude the case; often, this will result in the case being disregarded. Moreover, it can be difficult to outline contract defects if it's not in writing.
That being said, there are plenty of situations where enforceable contracts do not need to be written or spoken, they're simply implied. For instance, when you buy milk from a store, you give something in exchange for something else and enter into an implied contract, in this case - money is exchanged for goods.
There are some types of contracts which must be in writing.
The Statute of Frauds is a legal statute which states that certain kinds of contracts must be executed in writing and signed by the parties involved. The Statute of Frauds has been adopted in almost all U.S states, and requires a written contract for the following purposes:
Typically, a court of law won't enforce an oral agreement in any of these circumstances under the statute. Instead, a written document is required to make the contract enforceable.
Contract law is generally doesn't favor contracts agreed upon verbally. A verbal agreement is difficult to prove, and can be used by those intent on committing fraud. For that reason, it's always best to put any agreements in writing and ensure all parties have fully understood and consented to signing.
Verbal agreements can be proven with actions in the absence of physical documentation. Any oral promise to provide the sale of goods or perform a service that you agreed to counts as a valid contract. So, when facing a court of law, what evidence can you provide to enforce a verbal agreement?
Unfortunately, without solid proof, it may be difficult to convince a court of the legality of an oral contract. Without witnesses to testify to the oral agreement taking place or other forms of evidence, oral contracts won't stand up in court. Instead, it becomes a matter of "he-said-she-said" - which legal professionals definitely don't have time for!
If you were to enter into a verbal contract, it's recommended to follow up with an email or a letter confirming the offer, the terms of the agreement , and payment conditions. The more you can document the elements of a contract, the better your chances of legally enforcing a oral contract.
Another option is to make a recording of the conversation where the agreement is verbalized. This can be used to support your claims in the absence of a written agreement. However, it's always best to gain the permission of the other involved parties before hitting record.
Fundamentally, most verbal agreements are legally valid as long as they meet all the requirements for a contract. However, if you were to go to court over one party not fulfilling the terms of the contract, proving that the interaction took place can be extremely taxing.
So, ultimately, the question is: written or verbal agreements?
Any good lawyer, contract law firm, or legal professional would advise you to make sure you formalize any professional agreement with a written agreement. Written contracts provide a secure testament to the conditions that were agreed and signed by the two parties involved. If it comes to it, a physical contract is much easier to eviden in legal circumstances.
Freelancers, in particular, should be aware of the extra security that digital contracts may provide. Many people choose to stick to executing contracts verbally because they're not sure how to write a contract, or they think writing out the contract terms is too complicated or requires expensive legal advice. However, this is no longer the case.
Today, we have a world of resources available at our fingertips. The internet is a treasure trove of invaluable information, platforms, and software that simplifies our lives. Creating, signing, and sending contracts has never been easier. What's more, you don't have to rely on a hiring a lawyer to explain all that legal jargon anymore.
There are plenty of tools available online for freelancers to use for guidance when drafting digital contracts. Tools like Bonsai provide a range of customizable, vetted contract templates for all kinds of freelance professionals. No matter what industry you're operating in, Bonsai has a professional template to offer.
A written contract makes the agreement much easier to prove the terms of the agreement in case something were to go awry. The two parties involved can rest assured that they're legal rights are protected, and the terms of the contract are sufficiently documented. Plus, it provides both parties with peace of mind to focus on the tasks at hand.
Bonsai's product suite for freelancers allows users to make contracts from scratch, or using professional templates, and sign them using an online signature maker.
With Bonsai, you can streamline and automate all of the boring back-office tasks that come with being a freelancer. From creating proposals that clients can't say no to, to sealing the deal with a professional contract - Bonsai will revolutionize the way you do business as a freelancer.
Why not secure your business today and sign up for a free trial?