Paying Taxes on Freelance Earnings
Whether you’re a freelance writer, programmer, graphic designer, or anything else, any amount of money you earn online counts as “income” and you must pay taxes on it. As a self-employed online entrepreneur, you’re responsible for filing your own taxes and keeping track of your own accounting. Unlike a regular job, where your employer automatically withholds income tax, social security, medicare, etc, when you get paid from a client online (whether it’s through paypal, check, liberty reserve, ACH, or anything else), it counts as income, and that means you’ll have to pay Federal Income Tax, State Income Tax (if applicable), and even self employment tax. As a freelancer, you’re responsible for all of these taxes – so make sure to read each individual page to learn more about each tax.
Business Expenses
Taxes must only be paid on profits – so make to properly document your expenses, that way you can reduce your total tax liability. As a self employed freelancer you’re only allowed to legally deduct legitimate business expenses. If you earn money as a graphic designer (Designing banners, websites, etc) and you bought Adobe Photoshop, you can deduct the cost of the software from your income.
Here’s another example – let’s say the end of the year is approaching and so far you made $1,000 in profit as a graphic designer. Instead of keeping that $1,000 in the bank and having to pay taxes on it, you can spend it on something for your business. If you purchase a new $1,000 tablet PC which you plan on using for business purposes, you can deduct the full cost of the tablet PC from your income, which will bring your tax liability down to zero. As a freelance graphic designer, programmer, or even writer the purchase of computer hardware and office equipment would constitute as legitimate business expenses (provided you actually use them for business purposes). You can legally do this for nearly business expenses.
IRS Section 179 rule allows business owners to fully depreciate computer and office equipment the same year its purchased. (IRS Link to rule http://www.irs.gov/publications/p946/ch02.html#d0e1927)
Paypal, Liberty Reserve, bank fees, and other small transaction fees can also be deducted from your total revenues to reduce your overall tax liability. Most freelancers get paid through paypal, and paypal fees (especially for many small transactions) can add up quickly, so make sure you deduct these!