Freelancers are independent contractors that carry out a variety of tasks for various clients while working from the comfort and convenience of their own home, a park, or a café. The freelancers include individuals who work in social media content development, website design, consulting, and marketing.
But this comfort and convenience come at a cost because, in compliance with the Income Tax Act, independent contractors are required to pay taxes to the government on their income, just like salaried employees or business owners do.
The procedure of bookkeeping
Freelancers can keep track of their earnings and expenses and calculate their taxable income by using a self-employed tax calculator. The accrual and the accounting cash basis are the two types. For years, one accounting technique must be applied consistently. You cannot regularly change your strategy, for example, to avoid paying taxes or cutting expenditures. Use a tax bracket calculator to help you keep track of which one you belong to.
Taxation for freelance income
To track freelancing earnings, utilize the sections “Profits and Gains from Business or Profession.” Even if you are self-employed and are taxed at the same amount as that of a W-2 employee, you are not able to apply for the same standard deduction which applies to salary income.
However, a variety of expenses incurred throughout the course of a fiscal year in connection with the work completed may be subtracted in calculating taxable income. Rent paid for a space used for business purposes—also referred to as the “home office deduction“—depreciation on qualified capital assets, purchases of office supplies, routine phone and internet fees, transportation costs, and so forth are all deductible expenses. When such expenses are expended for both professional and personal reasons, only the fraction due to professional usage may be claimed.
Similar to this, you are eligible for a variety of deductions if you work as a freelance delivery driver for third-party applications like Doordash, Grubhub, or Instacart.
Anyone who earns money from a job or business must submit an ITR 3 income tax return. As a result, independent contractors who receive income must utilize the same form unless they choose the presumptive taxation option.
A more friendly tax system
You will have the choice of whether you want an alternative concessional tax rate (CTR) regime starting in the tax year 2022–2023, which allows your money to be taxed at a lesser rate if certain deductions, tax exemptions, or credits, losses carried–forward and depreciation that wasn’t absorbed are waived. Taxpayers have the option to use this option for every year of assessment.
However, taxpayers who earn money through their businesses or professions are not permitted to select between the two tax systems each fiscal year. After utilizing this option to revert back, the person will not be able to move to the new tax system in any upcoming fiscal year.
Therefore, a freelancer will only have one chance to switch, after which he will be required to pay taxes in line with the selected scheme until there is no longer any freelancing employment.
Because freelancers take on a variety of projects and earn money from both local and international services, calculating their taxes can be difficult and time-consuming. Using an amazing freelance tax calculator is usually recommended to get the most tax exemptions and to prevent any tax fines.