How much taxes do freelancers have to pay?

When you are a salaried employee, you receive a fixed monthly paycheck, your employer deducts a fixed amount of TDS as taxes and you are sorted. On the contrary, if you are self-employed or a freelancer, you’re your own boss, even the boss of your taxes.

How is income from freelancing categorised?

The Income Tax Act classifies all our earnings into 5 distinct heads. While a full-time employee’s pay is considered as ‘income from salary’, any income that you earn from freelancing is considered as ‘Income from business or profession.’

So, being a freelance writer, photographer, blogger or influencer basically means running your own business.

How is the income calculated?

Say, you are a freelance photographer and get a payment of ₹30,000 for a photoshoot. This payment would be your gross receipt. But, to reach the shoot location, you took a cab that cost you ₹1,000. This would be your expense.

Now, you would be doing various such photoshoots throughout the year and the aggregate of all such gross receipts will be your gross income. From this, you are allowed to deduct expenses that you incurred for earning that income, and then pay taxes on the net amount. Here’s another thread on what all expenses you can claim.

This seems easy when you have only a few transactions, but for tracking your payments and expenses throughout the year, you will have to maintain your books of accounts like a P&L statement and balance sheet.

What are the tax rates?

Income from freelancing is taxed as per the normal slab rates just like salary income. For example, if your net income for the entire financial year is ₹8 lakh and you opt for the old regime, you’ll fall under the 20% tax bracket.

When do you pay these taxes?

Now, in case of freelance income, a 10% TDS is applicable. This means that the entity paying you is liable to deduct 10% of the amount as taxes and deposit it with the government.

But, it may be possible that often times your client may not have a TAN (Tax Deduction Account Number) and in these cases, deducting TDS is not mandatory.

In such cases, you need to estimate your tax liability and pay it in the form of advance taxes. Here’s a detailed guide to calculating and paying advance taxes. Moreover, if you fall under a higher tax bracket, you will be liable to pay more taxes than 10% which was deducted as TDS.

Do you need a GST registration?

If your gross income from freelancing exceeds ₹20 lakh, you do need a GST registration and will have to file a GST return as well.

Which ITR form to file?

Whenever one has income from a business or profession, they have two choices.

One, they can maintain books of accounts and report their incomes and expenses in the ITR accordingly. In this case, ITR-3 will be filed.

Two, if you are just starting out and unable to maintain books of accounts for reporting, you can opt for the presumptive taxation scheme. Here, you can declare a fixed percentage of your turnover/revenue as profits and pay taxes on the same.

Freelancers in the United States are responsible for paying several types of taxes:

  1. Self-Employment Tax: This covers Social Security and Medicare taxes. For 2023, the rate is 15.3% on net earnings (12.4% for Social Security and 2.9% for Medicare).
  2. Federal Income Tax: The amount varies based on your income bracket, ranging from 10% to 37% of your taxable income.
  3. State Income Tax: This depends on the state where you reside and work, with rates ranging from 0% to over 13%.
  4. Local Taxes: Some localities impose additional taxes on income.

Freelancers must also make estimated quarterly tax payments to avoid penalties for underpayment. The exact amount owed depends on total income, allowable deductions, and applicable credits.