Freelancing provides flexibility and independence, but it also requires managing your own taxes. Unlike traditional employees, freelancers are responsible for reporting their income, tracking deductions, and making tax payments on their own. It’s important to understand the tax requirements in your country to stay compliant and avoid potential penalties. In this article, we’ll look at how freelancers handle taxes in both the UK and the US.
Freelancing Taxes in the UK
1. Registering as Self-Employed
Freelancers in the UK must register with HM Revenue & Customs (HMRC) as self-employed. This can be done online through the HMRC website and should be completed by 5th October following the end of the tax year in which you began freelancing.
2. Self-Assessment Tax Returns
Freelancers must file a Self Assessment tax return each year, detailing their earnings and allowable expenses. The UK tax year runs from 6th April to 5th April, and tax returns are typically due by 31st January following the end of the tax year.
3. Income Tax and National Insurance Contributions (NICs)
Freelancers are responsible for paying:
Income Tax: Based on earnings, with rates as follows (as of 2024):
Personal allowance: No tax on income up to £12,570
Basic rate (20%): Income between £12,571 – £50,270
Higher rate (40%): Income between £50,271 – £125,140
Additional rate (45%): Income above £125,140
National Insurance Contributions (NICs):
Class 2 NICs: £3.45 per week if profits exceed ¡2,000 (approx.)
Class 4 NICs: 9% on profits between £12,570 – £50,270 and 2% on profits above that.
4. Allowable Expenses
Freelancers can deduct business-related expenses from their taxable income. Common expenses include:
Office costs (rent, internet, phone bills)
Travel expenses (fuel, public transport, accommodation)
Equipment (laptops, software, stationery)
Marketing and advertising costs
5. VAT Considerations
If a freelancer’s income exceeds £90,000 per year (2024 threshold), they must register for Value Added Tax (VAT) and charge VAT on their services. Many freelancers also opt for the Flat Rate Scheme to simplify VAT calculations.
6. Payments on Account
HMRC requires freelancers to make advance payments toward their tax bill if their tax due is over £1,000. Payments on account are made in two installments (January 31st and July 31st) based on the previous year’s tax liability.
Freelancing Taxes in the US
1. Registering as Self-Employed
Freelancers in the US operate as sole proprietors by default. Some choose to register as an LLC (Limited Liability Company) for legal protection and tax benefits.
2. Filing Tax Returns
Freelancers report their earnings on Schedule C (Profit or Loss from Business), which is attached to Form 1040 (Individual Income Tax Return). The US tax year is the calendar year (January 1st – December 31st), and tax returns are due by April 15th.
3. Income Tax and Self-Employment Tax
Freelancers must pay:
Federal Income Tax: Progressive tax rates ranging from 10% to 37% depending on income.
Self-Employment Tax: Covers Social Security (12.4%) and Medicare (2.9%), totaling 15.3% on net earnings above $400.
State and Local Taxes: Vary by state; some states (like Texas and Florida) do not impose an income tax, while others (like California and New York) have higher rates.
4. Quarterly Estimated Tax Payments
Since freelancers don’t have taxes withheld from paychecks, they must make estimated tax payments quarterly (April 15, June 15, September 15, and January 15 of the following year) if they expect to owe $1,000 or more in taxes.
5. Deductible Business Expenses
Freelancers can reduce taxable income by deducting expenses such as:
Home office costs (deductible under the home office deduction)
Business travel and meals
Office supplies and equipment
Software, subscriptions, and advertising costs
6. Form 1099s and Record Keeping
Clients issue Form 1099-NEC to freelancers earning over $600 per year from them. However, freelancers must report all income, even if they don’t receive a 1099. Keeping track of expenses and income is essential to avoid errors during tax season.
7. Retirement Savings for Freelancers
Freelancers can reduce their taxable income by contributing to retirement plans such as:
SEP-IRA (Simplified Employee Pension)
Solo 401(k)
Traditional or Roth IRA
Conclusion
Handling taxes as a freelancer in the UK and the US requires careful planning and financial management. Keeping accurate records, understanding deductible expenses, and making timely tax payments can help freelancers avoid penalties and optimize their tax situation.
Whether you’re freelancing in the UK or the US, working with an accountant or using tax software can ease the process and ensure compliance with tax laws. Stay informed, stay organized, and make the most of your freelance income!