What percent of freelance income is taxed?

Are you a freelancer wondering how much of your hard-earned income will go to taxes? Understanding the tax implications of being self-employed is crucial to managing your finances and avoiding surprises come tax season.

As a freelancer, you're responsible for paying both regular income tax and self-employment tax. In this blog post, we'll break down the percentages and explain how these taxes work, so you can be better prepared and make informed decisions about your freelance income.

By the end of this post, you'll have a clear understanding of the taxes you need to pay as a freelancer and how to calculate them, ensuring you stay compliant with tax laws and keep more of your hard-earned money.

What is the self-employment tax rate for freelancers?

Freelancers are required to pay self-employment tax in addition to regular income tax. The self-employment tax rate for 2022 is 15.3%, which consists of two parts: 12.4% for Social Security and 2.9% for Medicare. This tax is calculated based on your net earnings from self-employment, which is your total income minus any allowable deductions.

It's important to note that the Social Security portion of the self-employment tax is capped at a certain income level. In 2022, this cap is set at $147,000. Any income earned above this threshold is not subject to the Social Security portion of the self-employment tax, but the Medicare portion still applies without any cap.

How is regular income tax calculated for freelancers?

As a freelancer, your regular income tax is calculated based on your taxable income, which is your total income minus any deductions and exemptions. The U.S. tax system uses a progressive tax rate structure, meaning that your income is taxed at different rates depending on which tax bracket it falls into. The tax brackets for 2022 range from 10% to 37%, depending on your filing status and income level.

To determine your taxable income, you'll need to account for any deductions and exemptions you're eligible for, such as business expenses, health insurance premiums, and retirement contributions. Once you've calculated your taxable income, you can apply the appropriate tax rates to determine your total income tax liability.

How can freelancers estimate their tax liability?

Estimating your tax liability as a freelancer can help you plan for tax payments and avoid surprises. To do this, you'll need to calculate both your self-employment tax and regular income tax based on your estimated income for the year. Here's a step-by-step guide to estimating your tax liability:

1. Calculate your net earnings from self-employment

Start by estimating your total income for the year, then subtract any allowable deductions to determine your net earnings from self-employment. This is the amount that will be subject to self-employment tax.

2. Calculate your self-employment tax

Multiply your net earnings from self-employment by the self-employment tax rate of 15.3% to determine your self-employment tax liability. Remember that the Social Security portion of the tax is capped at $147,000 in 2022.

3. Calculate your taxable income

Subtract any deductions and exemptions you're eligible for from your total income to determine your taxable income. This is the amount that will be subject to regular income tax.

4. Apply the appropriate tax rates

Using the tax brackets for your filing status and income level, apply the appropriate tax rates to your taxable income to determine your regular income tax liability.

5. Add your self-employment tax and regular income tax

Add your self-employment tax liability to your regular income tax liability to determine your total tax liability for the year.

6. Divide your total tax liability by four

Since freelancers are typically required to make quarterly estimated tax payments, divide your total tax liability by four to determine the amount you should pay each quarter.

7. Adjust as needed

As your income and expenses change throughout the year, you may need to adjust your estimated tax payments accordingly. Regularly reviewing your financial situation can help you stay on track and avoid underpayment penalties.

Mastering freelance taxes: Key takeaways and next steps

Understanding the taxes you need to pay as a freelancer is essential for managing your finances and staying compliant with tax laws. Here's a recap of the key takeaways from this post:

Freelance tax essentials

  • Freelancers are responsible for paying both regular income tax and self-employment tax.
  • The self-employment tax rate for 2022 is 15.3%, which includes 12.4% for Social Security and 2.9% for Medicare.
  • Regular income tax is calculated based on your taxable income and the applicable tax rates for your filing status and income level.
  • Estimating your tax liability can help you plan for tax payments and avoid surprises.

Now that you have a better understanding of freelance taxes, it's time to take action. Review your financial situation, calculate your estimated tax liability, and make a plan for setting aside funds for your tax payments. By staying proactive and informed, you can confidently navigate the world of freelance taxes and keep more of your hard-earned money.

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