Taxes III: Freelancing & 1099s | Cash Course | PragerU Kids

hey cash course fans before we start the show remember that you can get hundreds of free educational videos for all ages at pregn kids.com subscribe today and never miss an episode Once Upon a Time medieval knights were known for their loyalty to Kings and Lords but they didn't fight for free some knights with a free Lance fought for whoever paid them the most today's Freelancers better known as independent contractors don't ride into battle they work short-term jobs like writing music delivering food or acting in a renaissance fair this working style comes with unique benefits and it's different from being an employee for one company but there's a big difference when it comes to no no no taxes no specific laws determine who can be considered an independent contractor or an employee if you earn a regular salary for a company and work a regular schedule you're considered an employee if you're paid by a company for doing a specific job for a short period of time you're usually considered an independent contractor in 2022 36% of the American Workforce earn money as independent contractors Freelancers and gig workers they include people who make videos tutor students or design websites that's just a few ways to earn money with more flexibility without the 9 to 5 hours of being an employee as long as I deliver what my clients need on time I get to make my own schedule it's great being in charge and paying business expenses insurance and taxes like you're in charge oh that's right how does that work again let's break it down if you're an employee your employer will give you a wage and tax statement or a W2 for short when you file your taxes but if you're an independent contractor you're not an employee so you'll receive a $199 form from client who paid you more than $600 in a year what's the difference if you're a regular employee your W2 will show you how much your company paid you and the taxes they withheld from your paycheck a $199 on the other hand will only indicate how much you earn from a client and there won't be any taxes withheld as an independent contractor you're essentially your own business which means that you're responsible for paying all the taxes from the money you made so what taxes will I owe first all workers pay income tax they also pay taxes for Social Security and Medicare for an employee this is called payroll tax and the employee and the company each pay half but if you're a freelancer you're both company and employee so you'll pay the full share this is called self-employment tax in 2023 the self-employment tax rate was 15.3% so make sure you plan ahead Squire bring me my $10.99 papers that's a a lot of 1099 thanks but what am I looking at let's read it the non-numbered boxes on the left show your client's information and yours you'll probably recognize your tin or taxpayer identification number which is usually your social security number under recipients T but how much did I make that's in box one under non-employee compensation box two is for Freelancers that receive products to resell if you're a client withheld any state or federal income taxes you'll see that in boxes four 5 6 and 7 so far not bad make sure to check every $199 against your own personal records of what you've earned if something doesn't add up Let the business who sent it know right away when you're filing taxes you want everything to be accurate my form stand ready don't forget your deductions why what now this will cheer you up when you're self-employed you can deduct some of the things you bought for your business to reduce your taxable income these deductions are called business expenses and they can really add up business expenses do tell remember there's no company to buy you that new instrument that's all on you or if you're traveling for a job you'll pay for things like supplies and meals all tax deductible even your mileage so if you want to deduct something to reduce your taxes hang on to that receipt huzzah I'm going to deduct things like mad my sword my armor and this turkey leg wo hold your horses there are a few more steps to ensure you're on track for your taxes step one keep track of everything you earn and spend when a client pays you or when you have a business expense keep a record you'll want accurate records to compare to the 1099 you receive step two plan for what you may owe A good rule of thumb is to save 25 to 30% of what you earn for taxes there are also online calculators that can help you know how much you should save step three check with a tax specialist in your state filing taxes as an independent contractor can be more tricky than filing them as an employee a specialist can help you file your taxes and even help you get some of your money back before you make your next delivery or write your next song remember that while working as a freelancer can offer more flexibility it also comes with its own responsibilities this includes not just paying for things like insurance and other business expenses but also your own taxes doing it the right way will help you ensure that you win with your time and your money Splendid now back to my glorious [Music] Quest watch more at prer kids.com and parents don't forget to subscribe