Is Everyone Freelancing?
Are you one of the 60 million Americans who worked as a freelancer in the past twelve months? About one-third of the entire American workforce freelanced last year, and that number is growing.
As the US freelance market grows past $1.3 trillion, it is easy to understand why almost everyone is thinking about freelancing. The freelance market is also rapidly expanding with more complex and higher-paying work. More than half of post-grads are now freelancers.
Of the non-freelancers, 56% say they are likely to freelance in the coming months.
There are many benefits of freelancing. You can earn extra money, work from home, pick only the work you enjoy, and start your own side business with virtually nothing more than a computer and an email.
But you have to be cautious in one area – taxes.
With no employer or W-2, you are on your own when it comes to filing and paying taxes accurately and on time.
To the uninitiated, it can be challenging.
But with the right knowledge, and a freelance-friendly CPA, being a freelancer has tax advantages you can use.
Two Biggest Tax Mistakes New Freelancers Make
When you are a W-2 employee, tax filing is relatively simple. Your employer withholds funds for you during the year and sends that money to the IRS on your behalf. Sometime early the following year, your employer sends you a W-2 form you use to file your 1040.
Since the IRS already has the money withheld by your employer, many W-2 workers get some money back from the IRS. Others may still owe.
But when you are a freelancer, you have to file all the tax forms yourself. No one is withholding money for you. The two biggest mistakes freelancers make are-
- Not saving some of your income so you will have the money to pay the taxes
- Not filing quarterly tax reports with the IRS
Your Clients Are Reporting Your Income to the IRS
The majority of freelancers use online platforms like Upwork, Fiverr, and Freelancer.com. Upwork is one of the most popular, with more than 12 million registered freelancers earning more than $1 billion per year. Most of these platforms prepare 1099 forms for you that you access online.
Many freelancers have their own client base and get paid through online payment platforms like Pay-Pal, Zelle, and Venmo. Until now, these third-party payment platforms were not required to file a form 1099 unless you had 200 transactions and made more than $20,000 during the year.
But now, that reporting threshold is a mere $600 for the entire year.
The American Rescue Plan changed the 1099-K reporting requirements for third-party payment networks like Venmo and Cash App.
Beginning with the tax year 2022, if you receive payment for goods or services through a third-party payment network, they will report your income on Form 1099-K if $600 or more is processed.
This low reporting threshold includes the majority of freelancers. Ironically, some freelancers are having their clients pay them by paper checks.
Realistically, if you are making money as a freelancer online, the IRS is making your clients, and payment platforms report your income.
Are You a Freelancer or Employee?
Are you a freelancer or an employee? Since the tax rules are different, it is important to know whether the IRS would classify you as an employee or a contractor.
The IRS designates freelancers or contractors as those who are self-employed or work for themselves and provides services to other businesses or the general public.
To be classified as a contractor or freelancer and not an employee, you should
- Be in control of the result without directions and management
- Not be trained to do the job by the company contracting you
- Be paid a fee or by the job
- Not receive benefits like insurance or paid time off
The IRS has other specific requirements to differentiate whether or not you might be classified as an employee.
Tax Forms Freelancers Should Know
If you have ever been an employee, you are familiar with the W-2 tax form and the 1040 form U.S. Individual Income Tax Return.
Freelancer forms and filing requirements are different from an employee.
Here are the basics:
If you made all your income as a freelancer, you would report it on the Miscellaneous Income tax form. This form calculates your tax liability as a freelancer. If you also made some employee income, you would split them between a 1099-NEC form and a W-2 form.
Clients may also send you a 1099-MISC form. If you have multiple clients throughout the year, you need to collect these forms from each business.
If you received any payments from payment settlement entities like Zelle, Venmo, Paypal, or Stripe, they would be sending you a 1099-K form for payments over $600.
This form is a statement of reportable payment transactions. If one of your clients did not send you a 1099-NEC, you could use this form to document that income.
Use to pay quarterly estimated taxes. Some freelancers divide their taxes over four separate payments throughout the year. Or you can pay quarterly estimate taxes online through the IRS website.
Before you begin working for a business, they might have you fill out a W-9 and get your taxpayer information like name and address.
Freelance platforms like Upwork, or payment platforms like Gusto, have you fill out a W-9 before allowing you to register as a user of their service.
Freelancer Tax Deductions
As a freelancer, the IRS recognizes you are in business for yourself and allows you deductions not available to employees.
Some standard freelancer deductions are:
Home Office
As a freelancer or contractor, if you have a home office, you can deduct the cost of that office. There are, of course, IRS rules to follow. You will do some math calculations using the overall size of your home, the size of the office, and other factors. Notably, you must only use the office for business purposes.
You can also deduct the pro-rata cost for utilities like gas, electric, heating, etc.
Or you might choose the Simplified Option and deduct $5 per square foot of office space with a 300 square-foot maximum.
Education and Development
As a freelancer, you are constantly taking courses to stay competitive in your industry. These professional development costs are usually tax-deductible.
Website and Online Costs
Freelancers have online expenses. You have to design, pay, and maintain your website. You might have advertising expenses and more. Costs related to your freelancing website are businesses expenses and tax-deductible.
Software
You cannot run your freelance empire without great software and there is a software service for everything. There is software to collaborate with others, plan projects, calendar clients, increase your SEO, graphics, and more. Some of the more popular ones are Slack, Basecamp, Monday.com, Ahref, SEMRush, Canva, Adobe, etc.
Most software used by freelancers are monthly subscriptions, and they add up. Fortunately, they are tax-deductible.
Mileage and Travel
Legitimate mileage and travel expenses are deductible.
The IRS issues standard mileage rates every year for this purpose.
The current rates are:
- 57.5 cents per mile driven for business use
- 17 cents per mile driven for medical or moving purposes
- 14 cents per mile driven in service of charitable organizations
And More
There are even more deductions for freelancers. Ask your freelancer-friendly accountant how to maximize your legitimate deductions.
Freelancer Tax Filings
Freelancers’ tax filings are more complex than just being an employee. For example, there are quarterly filings and penalties for missed deadlines. Your freelance-friendly accountant can walk you through the filings and the best strategy to reduce your tax obligation.
Being a freelancer takes some tax planning and money management. Most first-time freelancers end up with a tax bill at the end of the year and no savings to pay for it.
Quarterly tax payments are paid on the following dates.
- April 15
- June 15
- September 15
- January 15
But you should check with the IRS or your accounts for the exact dates each year, as the deadline is pushed back if the filing day falls on a weekend or holiday.
If You Are a Freelancer - Let Us Help
Freelancers can have a great lifestyle. You can earn extra money or replace your income and go full time. You become your own boss with little to no business costs. You spend more time with your family and build your business your way.
The only bad part about freelancing is poor tax planning and a large unpaid tax bill at the end of the year.
Let us help reduce your tax burden and keep all your filings and documents on track.
At CE Accounting, we don’t just file forms and crunch numbers. We analyze your business and your business goals to minimize your tax obligations.
This includes helping you build your freelancer income.
We keep up with the laws, rules, and ever-changing tax code, so you don’t have to.
Call today and let us show you your next best steps for growing your freelancing business.
“This article is not intended to give, and should not be relied upon for, legal tax advice in any particular circumstance or fact situation. No action should be taken in reliance upon the information contained in this article without obtaining the advice of a qualified professional.”