When it comes to getting paid as a freelancer, there are two important terms to understand: net pay and gross pay.
Gross pay is the amount of money you pay yourself before any taxes and deductions are taken out. For example, if you’re planning to pay yourself $100,000 per year, that means you’ll earn $100,000 in gross wages.
Net pay is the amount of money you take home after all deductions have been taken out. This is the money you have in your bank account on payday. As a freelancer, you'll need to pay self-employment taxes if you earn $400 or more. While you may not owe any income taxes, you must pay self-employment taxes in addition to any regular income taxes.
But what if I earned less than $400 after expenses I paid from freelancing?
If you have business expenses that should be taken into account, you have to file a Schedule C to indicate that to the IRS. Say you earned $5,650 as a freelancer but you had $5,300 of expenses. While your net earnings are $350, you'd still have to file your tax returns because you grossed more than $400 in self-employment income.
What business expenses can I deduct from my taxes?
Any items or materials you need for your business can qualify for a deduction. As with all freelance expenses, these deductions must directly relate to your business. For example, you can't write off a class on coding skills if you're a graphic designer. Accordingly, you also can't write off education costs that prepare you for a new career, like a Masters Degree in Animation.
Here are some common expenses that you can write off:
- Business-related food expenses
- Lodging costs
- Office expenses
- Required equipment or materials (e.g. Adobe Photoshop)
- Home office expenses
Since most freelancers work from home, the home office deduction can apply. The IRS allows you to write off a portion of your rent, utilities, and internet bill for portions of your home that you use as an office. However, your office space must be exclusively used for your self-employment work. For example, you can't sit in your kid's bedroom from 9 to 5 and consider that your home office.
Being your own boss has its perks, but remember to set aside enough from each paycheck to account for Federal and State estimated taxes. If you get paid via Wingspan, you can have us automatically set aside estimated taxes from each payment into a separate account. And when it’s time to pay the IRS, it only takes one click from your Wingspan Wallet to get the job done.
You might also consider creating a separate business savings account for taxes to help you keep track of what you can spend vs. what you'll owe at the end of each fiscal year.
With Wingspan’s new bookkeeping feature, you’ll always have a real-time picture of your business’s health. It automatically flags potential tax deductions to maximize your savings, gives you an estimated amount of taxes you may owe, and shows you an up-to-the-minute profit and loss statement. Sign up for a 30-day Wingspan free trial.
Here’s some other resources to help make your business hum:
How to File Self-Employment Taxes: A Step-By-Step Guide
How to Manage Small Business Bookkeeping
How to Figure Out if You Should Take a Home Office Deduction
This information is not intended to provide, and should not be relied on for, tax or legal advice. Wingspan is a financial technology company, not a bank. Banking services are provided by Lead Bank, Member FDIC. The Wingspan Visa® Debit Card is issued by Lead Bank pursuant to licensing by Visa® U.S.A. Inc., both only available to eligible commercial entities. Terms and conditions apply.
