Start freelancing in the United States

Starting out as a freelancer in the USA can be a daunting task, especially when it comes to understanding the tax implications of your new business venture. However, with the right information and guidance, you can navigate the tax landscape with confidence. This guide will provide you with the information you need to know about registering your business, filing taxes, and managing your finances as a freelancer.

Where to get started

In the United States, freelancers have several options for setting up their businesses. The most common structures include:

1. Sole Proprietorship: This is the simplest and most straightforward option for an unincorporated business owned and run by one person. There is no distinction between the owner and the business, so all profits and losses are reported on the owner's personal tax return.

2. Limited Liability Company (LLC): This business structure offers the personal liability protection of a corporation and the tax benefits of a sole proprietorship or partnership. It’s a separate legal entity from its owner, but the owner still reports the business income and expenses on their personal tax return.

3. Partnership: Owned and run by two or more people, and similar to a sole proprietorship, it provides the added benefit of sharing responsibilities and profits with another person.

4. Corporation: This is a separate legal entity from its owners, offering them personal liability protection. It has more formal requirements and is subject to double taxation on its profits, but it can be beneficial for freelancers who plan on growing their businesses and raising capital.

Usually, freelancers running a sole proprietorship or a partnership will choose to conduct business under a name different from their legal name and for this they will need a DBA, or "Doing Business As". Registering a DBA allows a freelancer to legally operate under a business name other than their own personal name, but it does not establish a separate legal entity from the owner.

Where to declare, what, and how much

As a freelancer running either a sole proprietorship or a partnership, you'll need to file a self-employment tax return, which includes both your income tax and your self-employment tax (which is equivalent to the Social Security and Medicare taxes that an employer would pay on your behalf). You'll also need to file a Schedule C (Form 1040) to report your business income and expenses. It's important to keep accurate records of all your income and expenses, as this will help you to determine how much you owe in taxes.

Limited Liability Company (LLC)

If you run a LLC, you could be taxed as a partnership or a corporation, depending on the number of members. You'll also need to file an annual report with your state and pay annual fees. The profits and losses of your LLC will be reported on your personal tax return and will be taxed as personal income.

Corporation

Corporations are required to pay federal and state taxes, and they may also be subject to corporate income tax. Shareholders of a corporation are also taxed on the dividends they receive.

When to start filing VAT

If you're a freelancer operating in the USA, you'll generally not have to file VAT (Value Added Tax) returns. VAT is typically only required for businesses that sell goods or services to customers in other countries. However, if your business is in one of the states that has a sales tax, you'll need to register for and collect sales tax from your customers.

When to change company structure

As your business grows, depending on which form you chose to start freelancing as, you may want to consider changing the structure of your company. For example, you may want to form a Limited Liability Company (LLC) or a corporation. This can provide you with additional legal protection and tax benefits. However, it's important to consult with a tax professional and attorney before making any changes to your business structure.

What to write on quotes/invoices

When creating quotes and invoices for your clients, it's important to include your business name and EIN, as well as the client's name and contact information. You should also include the date of the quote/invoice, a detailed description of the services or products provided, and the total amount due. If you're collecting sales tax, be sure to include that amount on the invoice as well. Additionally, it's important to keep accurate records of all quotes and invoices, as this will help you to track your income and expenses.

More Information

For more information on taxes for freelancers in the USA, be sure to check out the IRS website (www.irs.gov). The IRS has a variety of resources available for small business owners, including tax forms, publications, and online tools. Additionally, the website provides information on self-employed taxes, sales tax, and business structures. This is an essential resource that every freelancer should have on hand.

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