Freelancing provides the freedom and independence to work on your own terms, but it also has financial responsibilities, such as understanding and handling taxes. In this blog post, we will look at income, costs, deductions, accounting procedures, advance tax, GST, and other areas of income tax for freelancer.
Table of Contents
Freelancing Income
Freelancers make money by providing services or selling items on their own. Whatever you earn is taxed that is obvious but there are provisions such as presumptive taxation which helps freelancers save a lot of taxes. Let’s understand the basics first and we will see how presumptive taxation works.
Expenses That Can Be Deducted
As a freelancer, you can deduct certain expenses from your taxable income. These could include:
- Supplies and equipment for the office
- Phone and internet bills
- Your workspace’s rent or mortgage interest
- Certifications or courses for professional growth
- Expenses for marketing and advertising
- Work-related travel and transportation expenses
- Premiums for health insurance (if not provided by an employer)
Conditions for Claiming Deductions for Expenses
Certain conditions must be met before expenses can be claimed as deductions which are:
- The expenses must be relevant to your freelance business.
- They must be accompanied by appropriate paperwork, such as receipts, invoices, and bank statements.
- The expenses should be fair and required for carrying out your freelance business.
Income Deductible Expenses
Aside from the expenses listed above, freelancers can deduct the following:
- Expenses for a home office (if you fit the criteria)
- Software and subscriptions for businesses
- Professional service fees (accountants, attorneys, etc.)
- Outsourcing labor to other freelancers’ costs money.
Expenses Associated with Personal and Professional Purposes
In some circumstances, you may incur fees for both personal and professional reasons. To deduct these expenses, you must first allocate the percentage that is related to your freelance employment. Here are a couple such examples:
- Phone bill
You can deduct a percentage of your phone cost if you use it for both personal and professional calls.
- Internet access at home
If you use the internet for personal surfing as well as work-related tasks, you can deduct a percentage of your charge according to your business operations.
Keep proper records and compute the corresponding amount to back up your deductions.
Expenses Not Allowable as Deductions
While freelancers can deduct a variety of expenses, many charges are expressly prohibited. These are some examples:
- Personal costs completely irrelevant to your freelance business
- Capital expenditures (such as the purchase of equipment or real estate)
- Penalties or fines imposed
- Meals and entertainment expenditures (unless certain criteria are met)
- Cash payments in excess of Rs. 10,000 (subject to vary dependent on tax restrictions)
Accounting Books for Freelancers
Maintaining adequate books of accounts as a freelancer is critical for precise financial management. Here is an example table to assist you in organizing your records:
| Expense Category | Date | Description | Amount | Purpose |
| Office Supplies | 01/05/2023 | Printer ink cartridges | Rs. 500 | Business use |
| Internet Bill | 01/05/2023 | Monthly internet subscription | Rs. 1,200 | 70% business use |
| Client Gifts | 15/06/2023 | Gift cards for loyal clients | Rs. 2,000 | 100% business use |
Accounting Method Selection
Freelancers have the option of using one of two standard accounting procedures.
Cash basis
When money moves hands, you record the revenue and costs. This strategy is simple and appropriate for freelancers with basic financial needs.
Accrual basis
Income and costs are recorded when they are generated or incurred, regardless of when the cash is collected or paid. This strategy yields a more precise financial picture and is appropriate for larger freelancing enterprises.
Select an accounting technique that is appropriate for the nature and complexity of your freelance employment. If you are unsure which approach is best for you, consult an accounting professional.
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Total Taxable Income and Tax Payable
Subtract your deductible expenses from your freelancing income to arrive at your total taxable income. The outcome is your taxable income, on which you must pay income tax depending on the current tax rates and slabs.
Advance Tax Calculation
In general, freelancers must pay advance tax if their expected tax bill for the fiscal year exceeds Rs. 10,000. To compute advance tax, use the following formula:
- Calculate your total freelance income for the fiscal year.
- Determine your expected deductible expenses.
- To calculate your estimated tax liability, use the applicable tax rates and slabs.
- Based on the advance tax payment schedule, divide your expected tax burden into installments.
(Read more: Advance Tax Payment Due Date, Applicability and Calculation)
Advance Tax Payment Deadlines
The following are the due dates for advance tax payments:
- 15th June: 15% of the projected tax liability
- 15th September: 45% of the projected tax liability
- 15th December: 75% of the projected tax liability
- 15th March: 100% of the projected tax liability
Advance Tax Payment
Freelancers can pay advance tax in a range of ways, including internet banking, check, or government-provided online tax payment platforms. Maintain the payment receipts as proof of payment.
Penalties for Failure to Pay Advance Tax
You may be subject to fines and interest charges if you fail to pay the requisite advance tax or miss the due dates. In most cases, the penalty is 1% each month on the outstanding sum.
Presumptive Taxation for Freelancers Section 44ADA
For service providers who are from the engineering, accountancy, medical, legal, architecture, and other tech backgrounds, they can adopt presumptive taxation. Presumptive taxation allows you to consider 50% of your total receipts as profit and then pay taxation on it. You can adopt for section 44ADA (also called presumptive taxation system) if your total receipts during the year is below 75 lacs. (Read more: Section 44ADA)
GST Applicability to Freelancers
Based on the nature of their services, freelancers are subject to Goods and Services Tax (GST):
- If you sell goods
If you work as a freelancer and sell tangible things, you may be needed to register for GST, collect GST from consumers, and file frequent GST returns.
- If you provide services
If you supply services, the GST applicability is determined by your annual revenue. If your sales exceed the government’s threshold limit (currently Rs. 20 lakhs in most states), you must register for GST, collect GST from clients, and file GST returns. However, for freelancers exporting their services, there is no threshold for applying GST. It becomes mandatory to take GST registration for export of services irrespective of any limit.
Important GST Reminders
Freelancers should keep the following things in mind when it comes to GST:
- Maintain accurate records of GST invoices, receipts, and expenses.
- Charge and collect GST at the appropriate rate on your invoices.
- To avoid fines, file GST returns by the deadlines.
How to Submit GST Returns?
GST returns include a variety of forms and due dates. For further advice on completing GST returns based on your unique circumstances, see a tax professional or go to the GST portal.
Should Freelancers File TDS Return?
Freelancers are generally not required to deduct tax at source (TDS) on their payments unless they meet certain conditions, or their income is subject to TDS under other regulations. It is best to contact with a tax specialist to determine whether TDS applies to your freelance income.
Conclusion
Understanding income tax requirements, deductible expenses, advance tax, and GST is all part of managing your finances as a freelancer. You may navigate the tax landscape with confidence and assure compliance with applicable requirements by keeping correct records, meeting deadlines, and getting professional guidance when necessary. Always seek the advice of a tax specialist or accountant for specific tax-related questions.
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