If you generate more than $400 in self-employed income in a tax year, you’re required to report that income and file taxes. This includes individuals who have their own business, as well as independent contractors and freelancers. Even if you’re not required to file a tax return, you may want to file to claim tax credits and overpayments that could result in money being returned to you.
While you may not owe any income taxes, as a freelancer, you must pay self-employment taxes if you earn $400 or more. Self-employment taxes are in addition to regular income taxes. The self-employment tax rate is 15.3 percent. This rate consists of two parts: 12.4 percent for social security and 2.9 percent for Medicare. Self-employment tax applies to net earnings or profit.
The amount you set aside for taxes as a self-employed individual depends on your tax bracket. It will be 15.3 percent plus the designated percent for your bracket. The only way to lower your self-employment tax is to increase business-related expenses, which reduces net income and self-employment tax. Regular deductions like the standard deduction won’t reduce your self-employment tax.
In the UK, the trading income allowance lets you earn up to £1,000 each tax year before paying tax. This tax-free amount is income, not profit. You don’t have to let HMRC know or register as self-employed. However, you must still submit a self-assessment tax return even if you earn under this amount.
Self-employed people face the same tax rates as employees, based on annual earnings. For 2021-2022, you don’t pay tax on the first £12,570. Therefore, if you earn under £10,000, you won’t owe tax but still must submit a return.