Freelancing Comes With a Bigger Tax Bill Than Most People Expect. Here's What to Set Aside.
Bottom line
Earn $5,000 freelancing this year and you could owe $1,413 extra at tax time.
In this guide
What it is
When you earn money outside a regular paycheck. freelancing, selling things, gig work. the government treats it differently than W-2 income (wages from an employer who withholds taxes for you).
By the numbers
On $5,000 of freelance income, you owe roughly 15.3% in self employment tax (Social Security and Medicare that your employer normally splits with you) plus federal income tax on top. totaling around $1,413 if you're in the 12% tax bracket.
How it works
A regular employer pays half your Social Security and Medicare taxes automatically, so you never see that money leave your paycheck. When you freelance, there's no employer. so you pay both halves yourself, which is the full 15.3% before income tax even starts.
The catch
Most people assume they only owe income tax on freelance earnings, so they don't set money aside for the self employment tax portion. That $1,413 bill shows up in April as a surprise because nothing was withheld from any paycheck during the year.
What to check next
Set aside 25% of every freelance payment you receive into a separate savings account labeled 'taxes' until you file.
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