Most people believe that freelancers do not have to deal with taxes, mainly because their job description differs from a standard entrepreneur. However, this is not the case. So, to answer the question – Do freelancers charge tax? Yes, such a self-employed individual is required to properly comply with all tax regulations laid down by the State in which they are operating.
But as a freelancer, you can reduce your tax bill and save hundreds of dollars in the process.
Even though a freelancer’s taxation process is not complex, many individuals have difficulties understanding Sales Tax and use tax and need to consider these two types while filing their tax returns. To provide a better view on the topic, what these two types mean to freelance has been mentioned next:
Do I need to charge tax for freelance work?
Yes, freelancers must pay self-employment taxes in addition to regular income taxes. However, self-employment taxes you will pay only if you earn $400 or more in the US.
This tax type will apply to those tangible personal properties and services purchased outside the freelancer’s state. The product/service in question should be bought from any State other than where it will be used. In the case of a freelancer, use tax is also applicable if the State’s retailer from where the product/service was sold does not collect sales tax. A freelancer also has to deal with the use tax if the sales tax in the freelancer’s operating State happens to be higher than the sales tax rate in the State from where the product/service was sold. Use tax applies to all freelance professionals like sole proprietors, individuals, and LLCs. Besides, they are also applicable to consumers and businesses.
Do freelancers Charge Sales Tax?
No, freelancers do not charge sales tax because freelancers offer services, not products. Because of that, most US states don’t allow you to charge sales tax on services. If you are a freelancer webmaster you should not expect to pay sales tax on freelance writers.
On the other hand, this tax type will apply to retail-sold tangible personal property and services. In case of use tax, a freelancer also needs to file sale tax returns if the freelancer happens to collect sales tax. So, if you are collecting sales tax and use tax, you need to get a sales tax license/permit. When freelancers apply for the license, they also receive a sales tax identification number depending on the State from where they will be operating.
Factors affecting use tax and sales tax for a freelancer
As these two types will apply to a freelancer, they must get familiar with the different factors influencing both of these taxes:
The State where the freelancer will be operating will affect the sales tax and use tax for the individual. Tax regulation will vary from one State to another. Having a sales tax exemption certificate is also another factor. Based on the State you are operating from, the certificate comes into effect when the final product/service sold is subjected to sales tax. In fact, in most cases, the seller should have a Certificate of Authority if they want to accept the exemption certificate. The type of product and service that the freelancer is involved with will also play in sales tax. Such kind of tax is only applicable to tangible goods and services. However, the list may differ from one State to another.
Besides these, many other factors can affect both use tax and sales tax for a freelancer. Knowing and understanding these factors will provide you with the insight that can help you handle the whole taxation procedure more effectively and accurately.
Tax deduction in the USA for a freelancer based on IRS are:
- Advertising and marketing
- Computer equipment and software
- Office supplies
- Home office
- Travel and business meals
In the rest of the world (EU, for example), freelancers have 5% to 15% smaller taxes than other LLC companies.
As a self-employed individual, the whole taxation responsibility falls on the freelancer, who can be overwhelming. Thus, you should get professional help to better grasp the entire thing and, most importantly, file and submit the related tax documents accurately and on time as per your State’s tax guidelines.