I work full-time and get a large tax return…how would going freelance full-time (writing) effect that?
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Category: Freelance Writing Help
I want to stay home with my kids and am getting enough work to be able to do that….I get 3 child tax credits and am a single parent/head of household. There is no other taxable income. Would I owe a lot?
Assuming I left my job.
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Free lance means self-employed. You would have to prove your income, prove your deductions, pay 15.3% self-employment tax on your net earnings. You may or may not owe income tax, may or may not have enough from EIC/additional child tax credit to cover the taxes owed.
If you break even, you might still get a tax return. But you have to keep records of everything. i.e. how much money you invest in your business (computer, phone, ads, printer and it’s paraphernalia (paper, ink etc.) and how much you get paid. You will have to fill out a sefl-employment tax sheet.
Depends on how much you make freelancing. Your income tax and EIC amounts would be the same tax as if you earned the same amount from a job as an employee. You’ll pay a self employment tax for social security that will be around 14.1% of your net income.
Since you won’t have an employe deducting taxes, you’ll have to pay it in quarterly yourself, with a form 1040ES
You are self employed or independent contractor. You will report your income and expenses on schedule C or C-EZ (Form 1040). This income is subject to SE tax at 15.3%. Read about self employed (or independent contractor) tax filing and payment of estimated taxes: http://taxipay.blogspot.com/2008/04/tax-filing-by-self-employed-sole.html
This is a long answer but it is worth reading.
I pretty much agree with Judy.
The only real changes would be that you would pay more in self employment tax and might have to make estimated tax payments.
I also agree with Judy that the maximum amount from self employment tax would be 14.1%, even though the rate is 15.3% (you only pay that rate on 92.35% of the net). So at this point it would cost you 6.45 percent to work for yourself. You are already paying 7.65 percent as an employee.
I also agree that it depends on how much you make. And it gets better. You are allowed to reduce your Gross Income by one half of your self employment tax. Depending on your tax bracket this could reduce the effective rate (assuming a 15% tax bracket) another 1.1%. This could make the cost to you at this point 5.44 percent. But, regardless of the tax bracket it will reduce the effective amount of being self employeed.
None these figures takes into account that you might qualify for additional expenses; or if you did qualify for them before you will not have to reduce them by 2% of your adjusted gross income. This would lower the effective rate too.
I almost always advise my clients not to let taxation determine a business/personal decision. Yes, it is important to know the effect it will have. But, that isn’t enough reason to make the decision. In the worst case for you (from information given) it would cost you 6.38 %.
I would suggest that you sit down and talk with and Enrolled Agent before you make this decision. There are several more means available that might reduce the net effect even further.
Hope this helps