Freelancing and Tax Return: What You Needed to Know
Most people believe that a freelancer does not have to deal with taxes mainly because their job description is different 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 be in compliance with all tax regulations laid down by the State in which he/she is operating.
But as a freelancer, you can reduce your tax bill and save hundreds of dollars in the process.
Even though a freelancer taxation process is not complex, still there are many individuals who have difficulties in understanding Sales Tax and Use Tax, and if they 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:
Does a freelancer need to deal with use tax?
This type of tax will be applicable to those tangible personal properties and/or services purchased outside the State from where the freelancer operates. So, the product/service in question should be purchased from any State other than the place where it will be used. In the case of a freelancer, use tax is also applicable if the retailer of the State 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 is applicable to all freelance professionals like sole proprietors, individuals, and LLCs. Besides, they are also applicable to consumers and businesses.
Does a freelancer need to deal with sales tax?
On the other hand, this type of tax will be applicable on retail-sold tangible personal property and/or services. Just 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/or use tax, then you need to get a sales tax license/permit as well. When a freelancer applies for the permit, he/she also gets 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 be applicable to a freelancer, he/she must get familiar with the different factors affecting both of these taxes:
The state where the freelancer will be operating from 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 he/she wants to accept the exemption certificate. The type of product and service that the freelancer is involved with will also come into play in case of sales tax. Such type of tax is only applicable to tangible goods and services. However, the list may differ from one state to another.
Besides these, there are many other factors that 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 to 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
Utilities
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 which can be overwhelming. Thus, it is advisable that you get professional help to have a better grasp on the whole thing, and most importantly, to file and submit the related tax documents accurately and timely as per your State’s tax guidelines.