Welcome 👋 to your essential guide for understanding key financial terms 🤗!
Whether you're a seasoned freelancer or just starting out, grasping these concepts can make managing your finances and planning for the future much simpler.
Let's learn some terms 🧐!
Tax Rate: What Does It Mean for Your Earnings? 💰
Term | Definition |
Tax Rate | The percentage of your earnings owed to the government. The rate is comprised of the following three tax types - Self-Employment, Federal Income, and State Income Tax rates. |
Self-Employment Tax Rate | Covers both the employee and employer portions of Social Security and Medicare taxes. It’s like investing in your own safety net for retirement and healthcare. |
Federal Income Tax Rate | Applies to your earnings after certain deductions. The federal system is progressive, meaning the more you earn, the higher the rate on your incremental earnings. |
State Income Tax Rate | Similar to federal taxes but at the state level. Not all states have this, and rates can vary widely. Knowing your state’s specifics helps avoid surprises during tax season. |
Understanding Different Income Types 🎨
Income Type | Description |
1099 Income | Earnings from gigs or freelance work where taxes aren’t withheld. WorkMade will help you to manage these during tax time. |
W-2 Income | Income from a job where taxes are automatically withheld. This is often linked with salaried or 'traditional' employment. |
Filing Status: How to Classify Yourself 🤔
Filing Status | Description |
Single | For individuals who are unmarried. |
Married Filing Jointly | For married couples combining their incomes and deductions on one tax return. |
Married Filing Separately | For married couples who choose to file separate tax returns. |
Head of Household | For unmarried individuals paying more than half the cost of keeping up a home for themselves and a qualifying person. |
Qualifying Widow(er) | For those who have lost a spouse and meet certain criteria, allowing similar benefits to those filing as married jointly. |
Other Essential Terms for Freelancers 💭
Term | Definition |
External Income | Money earned from sources outside your primary business activities, such as dividends or part-time work. |
External Expenses | Costs from activities not directly linked to your main business but still deductible, like a business-related magazine subscription. |
Audit Risk | The chance that the IRS will examine your tax returns. Keeping clear, thorough records reduces this risk. |
Tax Payment | The process of paying your taxes, often done quarterly for freelancers to avoid a large year-end bill. |
Penalty and Interest | Fees for late tax payments or underpayments. Staying on top of estimated payments helps you avoid these. |
Tax Savings | Reductions in your tax obligations through deductions and credits, which save you money 🤑. |
Wrapping Up 🌀
Understanding these terms helps you navigate your tax obligations more effectively and empowers you to make smarter financial decisions.
At WorkMade, we're here to simplify these concepts and support your journey as a freelancer. Stay tuned for more tips and tricks on managing your finances like a pro 😎!
📓 Each tax situation is unique. WorkMade provides general info based on guidelines from tax authorities, which may change over time. For more details, refer to Regulation CC.