How Do You Pay Taxes as a Freelancer?

Many of our Meridian Linguists are so-called “citizens of the world,” digital nomads who jump from place to place, or expats who moved abroad for love or opportunity. For many of you, this is how you learned your foreign languages in the first place!

Working remotely as a freelancer has obvious benefits (how many of you worked from a hammock by the beach this morning?) but when tax season rolls around it can get pretty complicated. Lately we have been getting lots of questions from our new translators about how to handle taxes as a remote freelancer, so we asked a few international tax specialists to guide us through the basics!

DISCLAIMER: This blog post is meant to be a general guide for understanding international taxation, and is not exhaustive or a substitute for hiring a professional tax accountant (these days, an accountant is very easy to find on platforms such as Upwork). We highly recommend you use this as a starting point to understand international freelance work, and to figure out how to hire the most effective tax accountant (or to download the best tax software)!

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HOW DO I PAY TAXES AS A FREELANCER?

A defining characteristic of the freelancer is that they do not depend on any single location (a city, a country) or a company, for their income.

However, freelancers do still have to pay taxes on the money they make.

As a freelancer, how you pay your taxes will depend on your relationship with your client. This relationship can take three possible forms:

1. The freelancer and the client enter into an employment agreement (rare in the freelance world)
2. The freelancer, acting as a private individual, enters into an independent contractor agreement with a client (this is the majority of freelance translation work, and the majority of all agreements at Meridian Linguistics);
3. The freelancer, registered as a legal entity (a company, also called being incorporated) enters into a commercial contract with client (more about the benefits of this later!)

PAYING TAXES AS AN EMPLOYEE VS AS A FREELANCER

If you are a freelancer, your client likely has no long-term tax responsibilities towards you, and you are responsible for calculating and filing your own taxes. Don’t worry! This isn’t as harrowing as it might seem.

WHO DO I OWE TAXES TO? 

Who you owe taxes to is usually determined by your tax residency. Usually, tax residency (for individuals) is determined by your physical presence in the state for a specified amount of time: for example, 183 days out of the year (the rule in Canada, China, Georgia, and Jordan).

However, some countries make it a little more complicated, for example the United States, where tax residency of an individual may be determined via not just one but three tests: 1) citizenship test – all US citizens are considered as US tax residents; 2) “green card” test; 3) substantial presence test.^[1]

So as a first step, you’ll want to Google (or Naver, or Baidu, or Yandex) the tax residency rules for the country where you are spending most of your time. And if you’re American, you’re considered a tax resident no matter where you actually live.

Wondering if you owe taxes to Hong Kong for your work at Meridian Linguistics? Unless you live in Hong Kong, it is very unlikely that you owe Hong Kong taxes. If you spent less than 60 days in Hong Kong during the fiscal year, you are 100% exempt from Hong Kong taxes.

What if you don’t live in the same place as your employer or client?

In today’s globalized world, things are rarely this simple. Luckily, if you as a freelancer live in a different state as your client/employer, you usually only owe taxes to your country of residency. However, there is a small possibility that your client country may also want to claim taxes on this income (for more information see the paragraph “So – what you can do in case when two states wish to tax your income?”). Usually this will depend on the amount you earned (many countries have a threshold amount over which you owe them taxes). If you have a loyal client in another country, from whom you are deriving a significant proportion of your income, it is a good idea to ask your tax accountant to double check if you have any tax responsibilities there.

WORKING FOR A HONG KONG CLIENT, LIKE MERIDIAN LINGUISTICS? YOU’RE IN LUCK!

If you work for Meridian Linguistics or other Hong Kong-based companies, but aren’t actually located in Hong Kong, you’re in luck! Only Hong Kong residents are responsible for paying Hong Kong taxes. So if you spent less than 60 days in Hong Kong during the fiscal year, you are 100% exempt from Hong Kong taxes.

If you are the citizen of most other countries, you should check the criteria for tax residency for the country where you spend most of your time.

So – what you can do if 2 states wish to tax your income?

This problem is called double taxation. Luckily, most states recognize double taxation as unnecessarily burdensome, and many have concluded international bilateral agreements in order to prevent double taxation, or at least reduce the burden on the taxpayer. If you think this might apply to you, you should check to see if the two countries in question have concluded a double taxation treaty. Often, one of the countries will forgive up to a certain amount of your taxes if you can show them you have to pay those taxes to another country.

OK, HOW DO I ACTUALLY PAY MY TAXES?

Once you have determined your tax residency status, you are responsible for reporting to tax authorities and paying the relevant taxes. Remember, as a freelancer, your client is not usually responsible for any payment of your taxes, although in some countries they will provide you with documents confirming the amounts they paid you, if you are paid over a certain threshold amount. For instance, under US tax law, the payer shall fill form 1099 in regard to every freelancer (non-employed) if the payment exceeds $600 a year.

However, it is important that you save all contracts and payment information (e.g. invoices, bank statements, etc.) in order to be ready to provide your tax authorities with the necessary evidence if they request it.

How to actually file and pay your taxes

As a freelancer, we highly recommend using software like Freshbooks, Xero, or Quickbooks to keep track of your income and expenses. Then, it is easy to hire a tax accountant on Upwork, or in some cases just download software to do your taxes!

Here is some tax software we can recommend:

SO, HOW MUCH WILL I OWE?

These will vary depending on the country and your own financial situation, and will reflect both how much you earned and how many expenses you have (save those receipts for any professional purchases, including conferences, CAT tools, and computers!) If you hire a savvy tax accountant, they’ll have good ideas on how to deduct these expenses to keep your taxes affordable. Usually how much you owe will be a percentage of what you earned, so as long as you take care to save a portion of your earnings every year, you should be okay!

Sometimes there are other obligatory payments in addition to taxes

In some countries, you may also be required to make obligatory payments, for example payments to  social funds or social security. These payments will usually be made at the same time as your taxes.

YOU’LL WANT TO GET IT RIGHT

If you try to conceal or misrepresent anything about your employment status, residency status, or income, and the tax authorities find out, you may be liable for fines and penalties. This is where hiring a certified tax accountant can not only save you some money (remember those deductions?) but can also offer you peace of mind.

HOW TO PAY TAXES IF YOU INCORPORATE AS A COMPANY?

Incorporation. Does it seem like everyone is doing it? This is because sometimes, incorporating as a company can save you a bundle on your taxes. But this will depend on where you incorporate, how much you earn, and the way taxes work in your home country. You’ll want to check the rules wherever your company will be registered. Because of Hong Kong’s attractive taxation regime explained above, many digital nomads choose to incorporate in Hong Kong.

Where is your tax residency, if you incorporate?

The company’s residency will usually be defined either as wherever it was registered, or from where it is governed (the place of effective management) and this will depend on the countries involved.

Corporate tax rates usually differ a lot from personal income tax rates – before you incorporate, look into the tax rates in the countries involved, and see if it is the right move for you.

OTHER TAXES YOU MAY OWE

In some cases, freelancers will be responsible for other taxes such as VAT (value added tax) or similar taxes (like GST, Sales Tax). As a freelancer, you should do your own due diligence on this. Since the freelancer is ultimately responsible for their own taxes, you should build these taxes into the quotes you provide to your clients, or even your per-word rates. If you don’t build these amounts into your quotes, just be aware that you’ll be paying the taxes out of your own income. Your client is not responsible for paying your VAT taxes, unless you specifically negotiate this beforehand.

NOTE: Hong Kong does not charge any additional taxes or contributions, nor are Hong Kong companies responsible for paying the VAT taxes of their freelancers.

REMEMBER: Don’t ever assume that the client is already aware of the tax responsibilities you have in your country, as they may be very different from the taxes the client pays in theirs!

We hope this guide helps you understand the basics of international taxation. Now that you have a basic understanding of tax residency and double taxation, you can go ahead and hire an accountant with competencies in the appropriate country, or download the appropriate software. Just remember, if you are a translator, you have probably heard the maxim:

If you think hiring a professional is expensive, try hiring an amateur!

This is particularly true when you do your taxes, because professionals will be aware of double taxation treaties as well as the best way to maximize your deductions. Do your homework, file on time, and keep enjoying the freedom of #freelancelife!

DISCLAIMER:

The information in this article is provided by a qualified tax accountant, however, every freelancer’s situation is unique and you should not use this article alone to prepare your taxes. We highly recommend you get your own situation evaluated by a tax accountant licensed to work in the country where you will be taxed.

GOOD LUCK!

Author: Raymond Mo is an accountant at KHSK Certified Public Accountants, in Hong Kong.

[1] you can find more details regarding US tax residency rules here