As a freelancer or professional in India, managing your taxes doesn't have to be complicated. The government has introduced a simpler way through Section 44ADA of the Income Tax Act - the presumptive taxation scheme that lets you pay taxes on just 50% of your gross receipts, regardless of your actual expenses.

No more maintaining detailed books or tracking every expense. Whether you're a doctor, architect, lawyer, or freelance consultant, this scheme could significantly simplify your tax compliance while potentially reducing your tax burden.

In this guide, we'll break down everything you need to know about Section 44ADA - who can use it, the limits, how to file your income tax return, and common mistakes to avoid.&nbsp;

What is Section 44ADA of the Income Tax Act?

<a href="https://incometaxindia.gov.in/Acts/Finance%20Acts/2003/102120000000009718.htm">Section 44ADA</a> is a simplified tax calculation method for professionals and freelancers. Instead of tracking every expense and making complex calculations, these normal provisions assume that half of what you earn is your net profit.

Here's how it works: You earned ₹20 lakhs from your consultancy work this year. Under Section 44ADA, You can declare ₹10 lakhs (50% of your earnings) as your taxable income. The remaining ₹10 lakhs are considered to cover your business expenses - no questions asked, no proof needed.

This straightforward approach saves you from the hassle of maintaining detailed expense records while potentially reducing your tax burden.

Who is eligible for Section 44ADA of the Income Tax Act?&nbsp;

Not everyone can take advantage of Section 44ADA - designed specifically for certain eligible professionals and small business structures. Let's break down who can benefit from this presumptive scheme.

If you're working in any of these fields, you're likely eligible:

For example, if you're a doctor running your clinic as an individual practitioner or in partnership with other doctors, you can opt for Section 44ADA. However, if you've structured your practice as an LLP or a private limited company, you won't be eligible for this scheme.

Remember, just because you're in one of these professions doesn't automatically mean you should opt for Section 44ADA. The decision should depend on your actual expenses and business circumstances. 

What are the limits under 44ADA of the Income Tax Act?&nbsp;

To use Section 44ADA, your professional income must stay within certain limits.&nbsp;

Here's what you need to know about these thresholds:&nbsp;

₹50 Lakhs If you're receiving payments through any means (cash, cheque, or online transfers), you can use Section 44ADA as long as your total professional income doesn't exceed ₹50 lakhs in a financial year.

&nbsp;₹75 Lakhs There's good news if you mostly receive digital payments. You can enjoy a higher limit of ₹75 lakhs if you meet this condition:

Scenario 1: A consultant earning ₹60 lakhs annually:

Scenario 2: A lawyer earning ₹55 lakhs annually:

💡Important: When we say "cash receipts," this includes not just physical cash but also bearer cheques and bank drafts that aren't account payee. To stay safe, always insist on account payee cheques or digital payments from your clients.

Taxable Income under 44ADA of Income Tax Act&nbsp;

Let's examine how your taxable income is calculated under Section 44ADA—it's simpler than you might think.

Under Section 44ADA, the tax department assumes half of your turnover is your profit. Here's how it works in practice:

Let's say you're a freelance architect who earned ₹40 lakhs this year:

📚Note: Once you calculate your income this way, you can't claim any additional expenses. The 50% calculation is final - even if your actual expenses were higher or lower.

<b>Can you declare more than 50%?&nbsp;</b>

Yes! The 50% is just the minimum. If your actual profit is higher, you should declare the higher amount. For example, if your real expenses were only ₹15 lakhs on a ₹40 lakh income, you should declare ₹25 lakhs as your taxable income.

A consultant earns ₹30 lakhs in a year:

Remember, this simplified calculation is one of the biggest advantages of Section 44ADA - no need for detailed bookkeeping or expense tracking!

Let's clear up a common confusion - Section 44ADA doesn't have its special tax rates. Instead, after calculating your taxable income as 50% of your gross receipts, you'll pay taxes according to regular income tax slab rates.

Here's a practical example: Imagine you're a freelance consultant earning ₹30 lakhs annually:

Choose your tax regime based on your overall tax situation, including available deductions and other income sources.

The only thing Section 44ADA does is help you calculate your professional income easily - it doesn't change how that income is taxed. You'll still need to pay taxes according to the normal income tax slabs applicable to you.&nbsp;

Section 44ADA of Income Tax Act with Example&nbsp;

Here, we look at two practical examples to understand how Section 44ADA impacts your tax calculations.

Example 1: A freelance software exporter&nbsp;

Meet Priya, a freelance software exporter who earned ₹40 lakhs this year with actual expenses of ₹12 lakhs.

In this case, Section 44ADA benefits Priya by reducing her taxable income by ₹8 lakhs.

Consider Rahul, a legal consultant with annual earnings of ₹35 lakhs and high operating expenses of ₹22 lakhs.

Here, Rahul would pay more tax under Section 44ADA since his expenses exceed 50% of his income. He's better off not opting for this scheme.

👉Key Takeaway: Section 44ADA isn't always the best choice, depending on your business expenses. If your real expenses are less than 50% of your income, 44ADA can save you taxes and reduce your compliance burden. But if your expenses are higher, you might want to opt for regular tax computation.

Do I Have to Pay Advance Tax Under Section 44ADA of the Income Tax Act?&nbsp;

Yes, you must pay advance tax if you opt for Section 44ADA, but the rules are simpler than regular advance tax payments.

What happens if you miss the deadline? If you don't pay advance tax by March 15th:

💡Pro tip: Mark March 15th on your calendar and set aside funds throughout the year to meet this obligation. It's better to be prepared than to scramble for funds at the last minute!

Do I have to Maintain Books of Account under Section 44ADA of the Income Tax Act?&nbsp;

One of the biggest advantages of Section 44ADA is that it frees you from the hassle of maintaining detailed books of accounts - with some conditions, of course. Let's break this down:

Suppose you're declaring 50% (or more) of your gross receipts as income, and your total receipts are within limits (₹50 lakhs generally, or ₹75 lakhs for mostly digital payments). In that case, you can skip maintaining detailed books of accounts.

When you must maintain books: You'll need proper bookkeeping in two situations:

Example: A consultant earning ₹40 lakhs annually who declares ₹20 lakhs (50%) as income:

The same consultant, if declaring only ₹15 lakhs as income (claiming higher expenses):

👉Remember: While detailed bookkeeping might not be mandatory, keeping basic records of your income and major expenses is still good practice for your reference!

Which ITR form to choose for Section 44ADA of the Income Tax Act?&nbsp;

If you've opted for Section 44ADA, you must file your returns using ITR-4. This form is specifically designed for professionals and businesses using presumptive taxation schemes.&nbsp;

Mistakes to Avoid When Opting for Section 44ADA&nbsp;

Many professionals miss benefits or face tax troubles because of simple oversights. Here are the key mistakes you should avoid:&nbsp;

large_Section 44 ADA of Income Tax Act

medium_Section 44 ADA of Income Tax Act

small_Section 44 ADA of Income Tax Act

thumbnail_Section 44 ADA of Income Tax Act

Section 44 ADA of Income Tax Act

Let’s discuss Raj, a small business owner in Delhi who spent countless hours managing his accounts and calculating expenses. With an annual turnover of ₹80 lakhs from his retail store, he struggled to keep track of every receipt (cash receipts included) and wondered if there was an easier way to handle his taxes.&nbsp;

Like many small business owners in India, tax compliance became a major challenge.

The good news is that the government has simplified tax filing through the presumptive taxation scheme under Section 44AD of the Income Tax Act. This guide will walk you through everything you need to know—from eligibility and income limits to filing your tax returns. Whether you run a retail store or operate as a freelancer, you'll learn how this scheme lets you declare a fixed turnover percentage as taxable net income, simplifying tax compliance.

What is Section 44AD of the Income Tax Act?

<a href="https://incometaxindia.gov.in/Tutorials/13.%20Tax%20on%20presumptive%20basis%20in%20case%20of%20certain%20eligible%20businesses.pdf">Section 44AD</a> makes it really simple for small businesses to calculate their taxable income. Instead of tracking and deducting every expense from gross revenue, this scheme lets you declare a fixed percentage of your turnover as income—8% for cash transactions and 6% for digital payments.

Let's say your business has an annual income of ₹50 lakhs, mostly through digital modes. Rather than maintaining detailed expense and other financial records, you can declare 6% of this amount (₹3 lakhs) as your taxable income. This presumptive income is then taxed according to regular income tax slabs.

The scheme removes the burden of extensive bookkeeping and helps small businesses focus more on growing their business than managing complex accounts.

Who is eligible for 44AD of the Income Tax Act?&nbsp;

Not every business can opt for Section 44AD. The scheme is specifically designed for small businesses operating in India.&nbsp;

However, professionals like doctors, lawyers, and architects must look at Section 44ADA instead of 44AD for their tax filing. Also, this scheme isn't for you if you've incorporated a private limited company.

Remember, the key word here is "resident of India ." Non-resident Indians (NRIs) running businesses in India can't opt for this scheme, even if they meet all other criteria.

📚Note: Being eligible by business type isn't enough—you'll also need to meet the turnover criteria, which we'll cover in the next section.

Which businesses are not covered under 44AD of the Income Tax Act?

Let us clarify <a href="https://incometaxindia.gov.in/Tutorials/13.%20Tax%20on%20presumptive%20basis%20in%20case%20of%20certain%20eligible%20businesses.pdf">which businesses can't use Section 44AD</a>, even if they meet the turnover criteria:

What are the limits under 44AD of the Income Tax Act?&nbsp;

Think of turnover as all the money your business earns in a year or the previous year. The limits for using Section 44AD depend on how you receive your payments:&nbsp;

Here's a simple example: If your business makes ₹2.5 crore annually and almost all payments come through bank transfers, UPI, or account payee cheques, you can use this scheme. But if you receive even ₹13 lakhs (more than 5%) in cash, you'll be limited to the ₹2 crore threshold.

📚Note: Payments received through bearer cheques or non-account payee bank account drafts are counted as cash payments. Only digital transfers and account payee cheques qualify as non-cash payments.

For instance, if you run a wholesale business making ₹2.8 crore annually with 98% payments through UPI and bank transfers, you can opt for Section 44AD. However, you won't be eligible if you run a retail store with the same turnover but receive 10% payments in cash.

Taxable Income under 44AD of the Income Tax Act&nbsp;

Let's understand how your taxable return of income is calculated under Section 44AD with some real-world examples:

Under this scheme, you don't need to calculate your profit by subtracting expenses. Instead, a fixed percentage of your total turnover is considered as your taxable income:

Say you run a grocery store with an annual turnover of ₹1 crore. If all your customers pay in cash, your taxable income would be ₹8 lakhs (8% of ₹1 crore). But if most customers pay through UPI or bank transfers, your taxable income would be only ₹6 lakhs (6% of ₹1 crore).

Here's another example: Your business has a turnover of ₹50 lakhs, with ₹30 lakhs through digital payments and ₹20 lakhs in cash. Your taxable income would be:

📚Note: You can't claim additional expenses after choosing these percentages. Even if your actual expenses are higher, they won't reduce your tax liability further.&nbsp;

However, you can always declare more income if your profits exceed these percentages.

Remember, this taxable income will be subject to regular tax rates based on your tax slab.

The tax under Section 44AD follows the same income tax slab rates that apply to all individuals. The only difference is in how your taxable income is calculated.

For example, if your business turnover is ₹50 lakhs through digital payments, your taxable income would be ₹3 lakhs (6% of turnover). This ₹3 lakhs is then taxed according to your income tax slab - whether you fall in the 5%, 20%, or 30% bracket depends on your total income, including income from other sources.

Remember, you can choose the old or new tax regime while paying taxes on this income.

Section 44AD of Income Tax Act with Example&nbsp;

Here are two practical examples to understand Section 44AD. These examples will help you show the difference between opting and not opting for this scheme:

Meet Priya, who runs a local grocery store with an annual turnover of ₹40 lakhs, mostly through UPI payments.

Taxable income: ₹5 lakhs (₹40 lakhs - ₹35 lakhs)

Consider Rajesh, who runs a wholesale business with ₹1.5 crore turnover mostly in cash.

No detailed bookkeeping is needed.<br>Simple ITR filing via ITR 4

Do I Have to Pay Advance Tax Under Section 44AD of the Income Tax Act?&nbsp;

If you opt for Section 44AD, you must pay advance tax, but the rules are simpler than regular advance tax payments. Let's understand this clearly:

Under normal tax rules, you must pay advance tax in four instalments yearly. But if you've opted for Section 44AD, you only need to make one payment - due date by March 15th of the financial year.

Here's a practical example: Suppose your business turnover for FY 2023-24 is ₹50 lakhs through digital modes. Your presumptive income would be ₹3 lakhs (6% of turnover). You need to calculate the tax on this amount and pay it as advance tax by March 15, 2024.

Warning: If you miss this March 15th deadline, you must pay interest under <a href="https://incometaxindia.gov.in/tutorials/6-interest%20payable%20by%20the%20taxpayer.pdf">Section 234C</a>. The interest is calculated at 1% per month on the unpaid tax amount.

💡Quick Tip: Estimate your annual turnover by early March and ensure you pay advance tax on time. This helps avoid any last-minute rush and potential interest charges.

Do I have to Maintain Books of Account under Section 44AD of the Income Tax Act?&nbsp;

One of the biggest advantages of Section 44AD is that it frees you from detailed bookkeeping requirements. Let's understand what this means for your business:

If you declare income at 6-8% of your turnover under Section 44AD:

However, it's still good business practice to keep basic records like:

For example, If you run a retail store with ₹80 lakhs turnover and opt for Section 44AD, you don't need to track every small expense like electricity bills, staff salaries, or shop maintenance. Depending on your payment modes, you'll just declare 6-8% of your turnover as income.

📚Note: This exemption from maintaining books applies only if you declare at least 6-8% of turnover as income. If you declare a lower percentage, you must maintain complete books and get them audited.

Section 44AD of Income Tax Act: 5-Year Rule&nbsp;

Once you opt for Section 44AD, you must stay with it for five consecutive years. Here's how it works:

Say you start using Section 44AD in FY 2022-23:

Here's a real example: Amit runs a trading business and opts for Section 44AD in FY 2022-23, declaring 6% of his ₹1 crore turnover as income. In FY 2023-24, he declares actual profits instead of presumptive income. As a result:

💡Pro Tip: Before opting for Section 44AD, consider whether you can commit to it for 5 years, especially if your business is growing rapidly or your profit margins differ significantly from the presumptive rates.&nbsp;

Which ITR form to choose for Section 44AD of the Income Tax Act?&nbsp;

If you're filing taxes under Section 44AD, you must use <a href="https://www.incometax.gov.in/iec/foportal/help/e-filing-itr4-form-sugam-faq">ITR-4 form</a> for your income tax return.

Mistakes to Avoid When Opting for Section 44AD&nbsp;

Watch out for these common mistakes under Section 44AD:&nbsp;

Before jumping in, make sure your business qualifies. For example, if you're a doctor or lawyer, you can't use Section 44AD (you need 44ADA instead). Also, check your turnover - it should be under ₹2 crore or ₹3 crore if 95% of your payments are digital.

Getting the math wrong on digital payments&nbsp;

Many business owners forget digital payments are taxed at 6%, not 8%. Let's say you receive ₹50 lakhs through UPI - your taxable income would be ₹3 lakhs (6%), not ₹4 lakhs (8%). This simple mistake could cost you extra tax.

Think carefully before opting out. Raj, a small retailer, opted out after two years, thinking he could switch back when it was convenient. Now he's stuck maintaining detailed books and paying for audits for five years - something he wasn't prepared for.

Once you choose Section 44AD, 6-8% is your final taxable income. Some business owners try to claim additional expenses on top of this, but that's not allowed and could get you in trouble with the tax department.

Remember: Section 44AD is meant to simplify your tax life. Following these guidelines can help you avoid unnecessary complications and keep things straightforward.

large_44AD of Income Tax Act

medium_44AD of Income Tax Act

small_44AD of Income Tax Act

thumbnail_44AD of Income Tax Act

44AD of Income Tax Act

In India, the implementation of the <a href="https://www.skydo.com/blog/how-to-file-gst-monthly-and-quarterly-for-freelancers?utm_source=blogs&amp;utm_medium=website&amp;utm_campaign=post_link">Goods and Services Tax (GST)</a> in July 2017 marked a significant shift in the country's tax regime. While its impact on domestic transactions is well-documented, its implications for foreign payments are equally profound yet often overlooked.

If you have a business or provide services to foreign clients, it is important to understand how GST can affect foreign remittances.

What is Goods and Services Tax in India? 

In India, the Goods and Services Tax (GST) is a crucial revenue source for the central and state governments. GST is levied on the supply of goods and services, ensuring a broad tax base. The revenue generated from GST contributes significantly to government finances, funding various developmental initiatives and public services across the country.

Goods and Services Tax (GST) is structured as follows in India:

<a href="https://writefreelance.in/gst-freelancers-india/#:~:text=Do%20I%20charge%20GST%20to,no%20liability%20to%20charge%20GST.">No, the Goods and Services Tax (GST) does not apply to a foreign client</a> if you receive foreign remittance for your services in a foreign currency and not INR.&nbsp;

For example, suppose you are a freelancer with multiple foreign clients in different countries. They pay you in their native foreign currency, deposited into your Indian <a href="https://www.skydo.com/blog/set-up-your-freelance-international-bank-account-in-just-5-minutes?utm_source=blogs&amp;utm_medium=website&amp;utm_campaign=post_link">bank account</a> in INR after conversion. In that case, you have no liability to pay GST on the received amount.&nbsp;

As per the ‘Export of Services’ head defined under Section 2 (6) of the IGST Act, 2017, the following conditions must be fulfilled for an Indian exporter/service provider not to be liable to pay GST when dealing with foreign clients.

However, you must request and receive a foreign remittance certificate from your bank or your digital currency platform for foreign remittance for compliance and tax purposes.&nbsp;

Although a foreign payment may not come with the liability to pay GST, fees related to foreign remittances may be subject to GST, depending on the nature of the service provided.&nbsp;

GST Implications For Different Scenarios&nbsp;

<a href="https://www.skydo.com/blog/time-taken-for-inward-remittances?utm_source=blogs&amp;utm_medium=website&amp;utm_campaign=post_link">Inward remittances</a> refer to funds transferred or sent into a country from abroad.&nbsp;

No GST applies for entities in India receiving inward foreign remittances in foreign currencies.&nbsp;

For example, if you are a freelancer and a client has paid you $1,200, you are not liable to pay any GST on the amount. This arrangement benefits businesses and service providers as there's no additional GST burden on transactions with foreign clients.

2. Compliance Handling &amp; Certifications (FIRC, BRC)

<a href="https://www.skydo.com/blog/importance-of-fira-for-freelancers?utm_source=blogs&amp;utm_medium=website&amp;utm_campaign=post_link">FIRC stands for Foreign Inward Remittance Certificate</a>, while BRC stands for Bank Remittance Certificate. Banks in India issue both certificates to provide proof of foreign currency remittance. GST applies to compliance handling and certification services.

These forex transactions related to foreign currency conversion attract 18% GST on forex, called GST on currency exchange. If the forex transactions are between banks and designated authorised dealers, there is no liability to pay GST. However, the bank may charge you 18% GST as the service of conversion is still taxable.

While GST on international transactions generally does not apply to the inward remittance amount itself, it may impact related services such as compliance handling, certifications, and currency conversion fees.

It is important for businesses and service providers such as freelancers to deeply understand the implications of tax on currency exchange and GST on foreign payments to streamline their billing process. It also ensures compliance with tax regulations and minimises any potential financial implications for themselves and their foreign clients.



large_How Does GST Affect Foreign Payments th

medium_How Does GST Affect Foreign Payments th

small_How Does GST Affect Foreign Payments th

thumbnail_How Does GST Affect Foreign Payments th

How Does GST Affect Foreign Payments th

According to a <a href="https://www.fiverr.com/news/new-year-survey">survey by Fiverr</a>, 66% of respondents plan to join a freelance platform for better flexibility, prevent job insecurity and gain financial freedom.&nbsp;

The survey also reveals that the top three goals of freelancers in 2024 were earning, saving and investing. If you also have these goals and want to switch to full-time freelancing, you should consider several factors, especially tax benefits.

This blog helps you understand the difference between self-employment tax vs. payroll tax in the U.S. with tips on how to maximise tax savings as an employee or independent contractor.

Here are some of the tax benefits that U.S. employees enjoy.

An employer deducts or withholds this amount from your salary and pays to the government on your behalf. It reduces your liability to calculate payable tax based on your salaried income.

Moreover, employees can seek government benefits such as social security income, unemployment insurance, disability insurance and medicare benefits with payroll tax deductions.

Withholding taxes also serves as income proof, making it easier to avail loans and clear other relevant applications.

2. Social Security and Medicare Contributions

All employees in the U.S. have to pay Social Security tax and Medicare tax. However, this tax isn’t paid directly to the government.&nbsp;

Employers deduct these taxes from the wages and deposit them with the government on behalf of the employees as per the Federal Insurance Contributions Act (FICA). Therefore, it reduces the burden on employees.&nbsp;

Moreover, the employers also make FICA contributions of 6.2% of each employee’s salary to Social Security tax and 1.45% to Medicare tax.

U.S. employees also get access to health insurance with minimum essential coverage. Moreover, many employers offer other health insurance benefits such as disability cover, vision and dental support.

Low-to-moderate-income employees can avail of the Earned Income Tax Credit (EITC). This tax benefit lowers the tax liability of individuals.

Some amount is credited to the taxpayer's account, depending upon their marital status and number of children. Therefore, the Earned Income Tax Credit maximises tax savings. You can check the eligibility, application requirements and credit limits <a href="https://www.irs.gov/credits-deductions/individuals/earned-income-tax-credit/earned-income-and-earned-income-tax-credit-eitc-tables">here</a>.

Additionally, during COVID-19, the U.S. government introduced the <a href="https://www.uschamber.com/sites/default/files/uscc_covid19_employee-retention-tax-credit.pdf">Employee Retention Tax Credit</a> (ERTC) for employees working at organisations shut down during the pandemic.

Full-time employees can avail the benefits provided under the Fair Labor Standards Act (FLSA). It offers fair standards for minimum wages, overtime, leaves and holidays, among others. However, it does not protect independent contractors’ rights.

For example, as an employee, you have fixed working hours, approximately 40 hours per month. If you must take up any work requiring long working hours, you will get adequate overtime compensation. However, as an independent contractor, there is no fixed standard for overtime if you spend extra hours on client projects.

Employees are also eligible for stock option schemes. Thus, employees get higher financial benefits as the company grows. However, Independent contractors do not inherit stock option schemes.

Some additional benefits available to employees include the following.

Some significant tax benefits available to independent contractors or self-employed individuals include the following.

Work flexibility and significantly growing earnings are the two key benefits of working as an independent contractor. You can show several expenses as business expenses and seek deductions to reduce your taxable income.

Moreover, sole proprietorships can also avail of the <a href="https://www.irs.gov/newsroom/qualified-business-income-deduction">Qualified Business Income (QBI) Deduction</a> as per Section 199A. This scheme allows Independent contractors to reduce their QBI by up to 20%. However, there are several limitations to availing QBI according to business type and other factors.

Additionally, if the business expense of independent contractors is higher than their business income, they can deduct the net loss from their gross income.

Independent contractors can show most of their expenses as business expenses and deduct them from the total income to maximise tax savings. Some of the standard business deductions you can claim in the U.S. are listed below.

The <a href="https://www.hhs.gov/healthcare/about-the-aca/index.html">Affordable Care Act</a> allows access to affordable healthcare benefits for independent contractors. You may also be eligible for tax credits if you purchase the insurance from the Health Insurance Marketplace.

Independent contractors or sole proprietors in the U.S. have to pay two types of taxes: the income tax and <a href="https://www.irs.gov/businesses/small-businesses-self-employed/self-employment-tax-social-security-and-medicare-taxes">self-employment tax</a> which comprises Social Security and Medicare taxes.&nbsp;

While finalising their self-employment tax consideration, independent contractors can also deduct the amount which would have otherwise been paid by an employer and adjust the gross income accordingly.

Here are some major differences between tax benefits for employees and independent contractors, including self-employment tax vs. payroll tax.

W-2 is a form employers provide to their employees which comprises information related to federal and state taxable income and social security and medicare income. It helps employees file their income tax return and avail credits or refunds, if any.

If you are an independent contractor, you must take a&nbsp; Form 1099-NEC from your clients to file the annual tax return. It tells how much payment a business has made to you in the previous tax year.

An employer deducts payroll tax from employees’ wages. The tax rate is usually 15.3%, from which employer and employee pay 7.65% each.

Independent contractors pay self-employment tax on 92.35% of the net earnings. Like payroll tax, the self-employment tax is 15.3%, which independent contractors must pay completely.

Moreover, the initial $168,600 of the net earnings will be considered for payment of social security tax in 2024.

Independent contractors can use deductions in the form of business expenses to reduce taxable income. On the contrary, employees who earn low-to-moderate income can reduce their tax liability by availing Earned Income Tax Credit benefit.

What is the Best Form of Employment Based on Tax Implications?

Employees have a structured work arrangement but a fixed income. They cannot control their working hours and workload. However, independent contractors can decide their workload and working hours.&nbsp;

They get unlimited leaves and have better work flexibility. They can also maximise their savings by taking on more clients. However, employees get limited overtime compensation.

There are several tax benefits for employees and independent contractors. Employees have more convenient tax calculations and filing because most of the work is done by the employers. However, that also means limited earnings.

Independent contractors, on the other hand, have to calculate and file taxes by themselves, but there is no cap on earnings.

Employees have access to health benefits, and the employer pays half the payroll taxes. Even though independent contractors lack such benefits, they have better work autonomy and can compensate for additional expenses by <a href="https://www.skydo.com/blog/freelancer-earning-potential-in-2024">increasing their freelance earnings.</a>

Employees have a steady income and get retirement benefits. However, independent contractors have variable earnings and can <a href="https://www.skydo.com/blog/personal-finance-tips-and-tricks-for-freelancers">plan their retirement</a> according to their savings.

Practical Tips for Maximising Tax Benefits

Here are a few tips to reduce taxable income and maximise tax savings.

1. Invest in Pre-Tax Retirement Savings&nbsp;

If your annual income is $70,000, you invest $2,100 in pre-tax savings. The net taxable income will be $67,900.

Employees can invest in pre-tax savings through 401(k) or 407(b). Ensure that you and your employer make the same amount of contribution to the retirement fund to maximise your savings.

However, independent contractors who run a business alone or with their spouse, without any employee, can benefit from a solo 401(k) or self-employed 401(k). Independent contractors can contribute both as an employer and an employee. The total contribution limit for 2024 is 25% of the gross income or $69,000 for 2024.

2. Take Advantage of Employer-Sponsored Benefits or Self-Employment Deductions

Growing Global

All things Tax blogs