With the increasing popularity of sites like Upwork, many professionals are embracing freelance work. Working freelance with sites like Upwork allow professionals to generate a healthy stream of income, supplement their existing income, and enjoy a little more freedom than the 9-5 grind.
As a freelancer, you are considered self employed, even if you currently hold down a W-2 job as well. This means that regardless of if you are full time or part time, there are certain tax obligations that will apply to you. Here are some tax tips for freelancers.
Self Employed Taxes & Estimated Taxes
One of the most important tax tips for freelancers, is to make all required tax payments. This includes both self employed tax payments and estimated tax payments. If you work as a freelancer and anticipate owing more than $1,000 in taxes, then you can be liable to make these tax payments. It is important to make sure you accurately calculate payments and make payments on time. The best way to make these payments is to set up an account online and pay online. Learn more about how to pay your taxes online here.
Self Employed Taxes
Since freelancers are considered self employed, they are subject to self employment taxes. Self employment taxes account for both your portion and the portion an employer would pay for Social Security and Medicare taxes. The current self employment tax rate is 15.3%, with 12.4% going towards Social Security, and 2.9% going towards Medicare. Self employment taxes should be paid on a quarterly basis along with your estimated taxes if you expect to owe $1,000 or more in taxes.
The key thing to note, however, is that these taxes are assessed on net income. Meaning your earnings after deductions. If you have more legitimate business deductions than earnings, then you have a net loss and therefore would not make any estimated tax payments. However, for service businesses, including freelancing, this is often not the case since there are few deductions associated with providing your services.
Many times when we work with a new freelancer reporting their income, we have to educate freelancers on typical deductions that are available in order to reduce the tax burden in a legitimate way. Here’s a spreadsheet we’ve prepared on Dropbox for being able to do this: Business Deductions.
Estimated taxes are also important to be mindful of as a freelancer. Since an employer is not withholding income tax on your behalf, and the IRS doesn’t want to wait to collect, you are responsible for making these payments. As we mentioned above, estimated tax payments are due on a quarterly basis, starting April 15, June 15, Sept. 15, and Jan 15. The easiest way to calculate the amount you should pay for your estimated taxes is to base it off the total amount you paid the prior year. Take the amount and divide that by 4 to arrive at a quarterly payment amount. You can always adjust your payment amount, and in the event you overpay, you will receive a refund.
What You Need to Know About 1099’s
As a freelancer you are considered an independent contractor, in which case you should receive a 1099. A 1099 is a form that reports various types of income other than W-2 earnings to the IRS. For example, if you are a freelance web designer, and a digital marketing firm hired you to complete a job for a client, they would be responsible for issuing a 1099. Other sources of 1099 income can include Uber driving, renting your car out on Turo, or listing your spare bedroom on Airbnb. In these instances, Uber, Turo, and Airbnb can issue a 1099.
For freelancer, it is often a 1099-K from Upwork. Upwork issues a 1099 if you reach 200 transactions and 20k in revenue – both need to be true. Please note, that you may not always receive a 1099. In the event that you do not hit the threshold, you may not receive a 1099, however, the IRS still wants you to report the income and you’re required to do so. If you do receive a 1099, it is important that you report it accurately, as the IRS also receives a copy of the 1099.
Be sure that your gross earnings reported on your tax return (before deductions) is at least as much as the 1099’s received by your clients. Also note that while you may not receive a 1099, the IRS can request gross earnings from the platform and if those earnings are not reported, they can issue a notice of proposed adjustment where all the earnings are taxed (instead of being able to report earnings less deductions).
Important Tax Tips For Freelancers
Some important tax tips for freelancers to also consider include:
- Have a good accounting system in place to keep track of all expenses and income.
- Take advantage of the home office deduction. This allows you to claim a portion of your rent, mortgage interest, utilities, and insurance as a deductible expense. There are some stipulations, for example the space must dedicated solely for business purposes, a spot on your kitchen table does not qualify.
- Know which business expenses qualify as deductible expenses. These include: marketing, travel, office supplies, software, subscription fees, etc…
- Contribute to your IRA. This is a really important tax tip for freelancers, as it helps fund your retirement and also qualifies as an above the line deduction. The amount of the deduction is equal to the maximum annual contribution amount of $6,000.
- Work with a good tax advisor. This is important because it saves you time, stress, and in the long run money. Taxes can be complicated, especially if you have more than one source of income, which many freelancers do. In addition, having the right guidance when it comes to tax deductions and tax planning is important.
Questions about taxes? Contact the tax and accounting experts at Shared Economy CPA. For more tax tips for freelancers subscribe to our newsletter.