Many people think that they need to pay taxes only when they’re doing a job. Wrong! Whether you’re freelancing for a client or selling a product, you’re liable to pay taxes on the money you’ve earned.
It doesn’t matter if you’re working 9-to-5 or 5-to-9; if you’re earning, you’re liable to pay tax. According to Section 194J, professional service providers must pay TDS (Tax Deducted from Source) for the services they provide. The TDS is 10% of the income. Apart from that, you pay the leftover tax based on your income while filing ITR.
Hurts, right? It hurts more if you’re in high-tax countries like India, the US, etc.
You can’t avoid taxes, but you can save yourself from paying more. Don’t worry; I’ll tell you everything you need to know about taxes as a freelancer or side hustle owner. Let’s begin:
Side Hustle Income and Taxes
People have become more aware, especially our generation. We now see a 9-to-5 job as an iron chain. This is why the number of freelancers and side hustle owners has increased substantially over the last 5 years. Everyone wants to work from their couch or a beach on their own terms.
But no one wants to pay taxes. Or rather, the Indian population isn’t educated enough to think, read, or file taxes. People doing jobs get their salaries after deduction, but freelancers often don’t. They get paid, they spend, and they become tax thieves without knowing themselves.
Now, what is side hustle or freelancing income, and how is it taxable? According to the Indian tax laws, if you make money using your skills, it’s considered professional income. This income is taxable as “Profits and Gains from Business or Profession.”
Difference between Total Taxable Income and Tax Payable
So far, we’ve learned that if you earn, you pay tax. But that doesn’t mean you need to pay tax on every penny. Your total income isn’t equal to your total taxable income. There is a difference:
Taxable Income = Total Income – (Standard deductions + exemptions + some expenses)
You can reduce the tax outgo by fully utilizing the Section 80C benefits. Section 80C of the Income Tax Act offers multiple ways (deductions on certain expenses and investments) that you can claim.
Net Taxable Income = Gross Taxable Income – Deductions
Allowed Deductions for Freelancers
The government allows freelancers to deduct their expenses from their income. Anything from utilities to travel fares can be deducted. Given that the deductions are directly related to the service they provide. There are certain conditions to claim these expenses from tax deduction:
- Expenses must be directly related to the freelancing service
- It is spent within the taxable year.
- It is not a personal expense and must have been fully spent on the work
Now, what all can you claim?
- Rent: If you’re living on rent, you can claim tax benefit for the rent paid.
- Asset depreciation: You can claim a small portion of your depreciating asset cost every year. For example – you bought a laptop for your work for 90K. Assuming the depreciation rate of 33%, you can claim 30K as an expense every year for the next 3 years.
- Office expense: This includes your workspace rent, furniture, internet bills, phone bills, etc.
- Travel/Meal/Hospitality expenses: You can claim the travel costs incurred in meeting your clients, the hospitality and meal expenses that you spent on your client visit, etc.
- Business Expenses: This includes the domain registration, application purchases, etc., that sum up to the online identity of your business.
- You can also claim the standard deductions and insurance premiums.
How to File Income Tax as a Freelancer
Or a side hustle owner.
So far, you’ve learned that freelancers also need to pay taxes and the allowed deductions as a freelancer. Now, let’s see how you can file income tax as a freelancer. Steps below:
- Go to the Income Tax E-Filing Portal.
- Go to the ‘download’ menu and download ITR-4.
- Fill out the downloaded ITR-4 form (basic info, gross and taxable income, deductions, etc.)
- Use the form 26AS to calculate your tax. You can use various exemption and deduction sections to save maximum tax. For example – Section 80C, 80D, 80CCF, etc.
Now, if you’re a freelancer and you owe more than Rs. 10,000 in taxes for the year, you must pay advance taxes every quarter. Here’s a simple step-by-step guide to make these payments:
- Visit the IT department’s tax information network.
- Choose the option for challan 280.
- Fill in your personal details: select (0021) for income tax other than companies, specify the tax payment type, choose the right assessment year, and enter your address, PAN (Permanent Account Number), contact information, and payment method.
- Review the information you’ve provided carefully.
- Make the payment and obtain a tax receipt.
- Keep the receipt safe, as you’ll need it when filing your income tax return.
Understanding tax rules and the benefits of presumptive tax schemes can help freelancers reduce their tax burden and simplify the income tax filing process.
Please note that this blog is for educational purposes only, and it does not endorse or recommend any specific securities or investments.
GST for Freelancers and Side Hustlers?
Listen up; this is important! The game has changed, and it’s called the Goods and Services Tax (GST). In the old days, you might have dealt with VAT and Service Tax, but those have now been replaced by GST.
If your business involves selling physical goods, GST has taken over from the old VAT system. The GST rate you need to apply depends on the type of products you’re selling. For instance, if you’re baking and selling delectable cakes to local bakeries, you’ll need to include an 18% GST. That’s the current rate for cakes.
For most services, an 18% GST applies. So, if you’re offering your freelance services, your clients should expect an 18% GST charge on their invoices. To keep up with the latest rates, you can make use of some GST Rate Finders online.
Let’s Crunch the Numbers:
Imagine you’ve invoiced a client for a total of Rs. 75,000. Applying the 18% GST rate, that amounts to Rs. 13,500 (75,000 * 18%).
Now, your invoice should display a total of Rs. 88,500, with Rs. 13,500 collected as GST. Happy? Don’t be. Remember, this GST amount needs to be remitted to the government.
Important GST Considerations:
- If your total freelance earnings don’t exceed Rs. 20 lakhs, you’re in the clear – GST doesn’t apply to you.
- There’s a handy option known as the composition scheme if your turnover for goods or services falls below a specific threshold.
- Certain transactions, such as exports, fall under the zero-rated supplies category and are exempt from GST.
- Ensure that your invoices adhere to GST regulations. To simplify this process, you can utilize our free tool to generate GST-compliant invoices and seamlessly file GST returns through ClearTax GST software.
- For more comprehensive insights into how GST impacts freelancers, delve into our in-depth article on the subject.
Making GST Payments:
GST payments can be conveniently made online. It’s mandatory to opt for online payments if your dues surpass Rs. 10,000. Depending on your turnover and the composition scheme you choose, you’ll need to remit GST on either a quarterly or monthly basis.
Be mindful that delays in sending GST to the government may incur interest charges. So, even if your client doesn’t pay on time, you need to pay the taxes ON TIME.
Filing GST Returns:
You’ll be required to file GST returns either quarterly or monthly, depending on your turnover and composition scheme status. Sellers of goods with annual sales below Rs. 1.5 crore can file returns on a quarterly basis. Meanwhile, service providers have a Rs. 50 lakh threshold.
Once you obtain a GST Identification number, filing returns becomes obligatory. Stay compliant, and keep up the good work!
Skipped the Article? Read this:
If you’re freelancing or running a side gig, taxes are still a thing you need to deal with. It doesn’t matter if you work 9-to-5 or have a side hustle; if you’re making money, the government wants a share.
But here’s the deal: you can’t dodge taxes, but you can be smart about it. You can deduct some expenses related to your work, like rent, office supplies, and even a part of your laptop’s cost. When it’s tax time, you can use forms like ITR-4 to declare your income, claim deductions, and figure out how much tax you owe.
And then there’s this thing called GST (Goods and Services Tax). If you’re selling any product or offering services, you might need to charge GST to your clients. The rate depends on what you’re selling, and you need to send that GST money to the government.
So, long story short, you can’t escape taxes, but with some know-how and a bit of effort, you can manage them wisely and keep more of your hard-earned money in your pocket.