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Learn Freelancer Tax Laws If You’re Working as a Freelancer

Posted on October 20th, 2016

Why be Tax law literate?

It’s good to be a freelancer as everything seems easy. However, most people don’t know that when you’re working as a freelancer you’re considered to be running a small business and that’s what makes it difficult when tax season arrives. Therefore, a lot of freelancers opt for a better legal business structure, which gives them room to play around a bit with the rules and tax laws.

Many freelance working individuals register their earnings as “miscellaneous income” under Schedule C (1040), but many full-time individuals find it more benefiting to register themselves as a business, and below we’ll discuss why that is so.
Three types of business structures

Three types of business structures

There are multiple business structures that are quite famous among freelancing individuals, because of the feasibility they provide, namely: Sole proprietor, LLC and S corp. Each brings their own advantages and disadvantages. We’ve tried to discuss each of them briefly so you can understand the basic difference between them.
Sole proprietorship

Sole proprietorship

Sole proprietorship is the default status you get if you’ve not registered yourself as something else. If you’re currently working as a freelancer you will probably be recognized as a sole proprietor. Everything is pretty straightforward with sole proprietorship until and unless you’re not being held liable to something, because in Sole proprietorship there is no distinction between you and your business. This means that if your business is liable to someone then you’ll be held accountable for it and there is no limit to how those liabilities will be covered. You might have to lose your personal assets in order to settle the liability. If a business wants to take action against your work they can directly take action against you. So, its easiness comes with a cost and you should be mindful about it.

Limited Liability Company (LLC)

An LLC covers all the deficiencies that Sole proprietorship has, which is the reason it’s considered as the first choice for most freelancers. Basic purpose of LLC is to separate you and your business, as it provides a shelter that saves you from any unforeseen harm. There is more to it but the basic difference is simple.

S corporation

S corporation is a special kind of structure that gives you an edge if you’re a small business. It saves you from both personal and corporate taxes, you pay yourself a salary and receive dividends from any additional profit that the business may earn. But S corporations have much stricter guidelines for taxes.

Which structure is better?

Each structure has its own set of advantages and disadvantages, what we’ve described above is only a fraction of the full package. The point of writing this article is to make you aware of why being a tax law literate is important and useful, even more so if you’re a freelancer.

When there is a need to hire a Professional?

Understanding tax laws is not difficult, it only requires a little dedicated effort. But if you think you don’t have the time then it’s better to hire a professional for it. Most people think they can avoid taxation if they’re working as a freelancer, but that’s a mistake, as sooner or later you’ll have to present your documents before being audited. It’s always a prudent option to create a filter between you and your business beforehand, otherwise you might end up giving yourself in self-liability.
It’s better to hire a professional if there is a risk of being wrongly taxed. Not only because a professional can guide you better, but it may also open new options, which you might’ve not known before.

Changing Era

As you might have already noticed, the amount of freelance work is increasing and the government is aware of this fact. Therefore, new laws are being prepared to cater to that need. In our opinion tax law education is a must if you plan to or currently work as a freelancer, not only is it helpful but it makes you a responsible citizen as well.


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