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Many people these days are switching to a new model of work. Instead of being on the payroll as a traditional employee, they are working as freelancers.
Being a freelancer has many advantages. You have more control over your hours, the amount of work you take on, and how you accomplish that work. Not to mention, many freelancers make more money for their work per hour than they did as employees.
But, when it comes to taxes, the story is a bit different. Freelancers no longer have it as easy as traditional employees. In fact, if this is your first year working as a freelancer, you can expect major changes when it comes to managing your taxes. Here are four tips to get you started.
1. Gather all your Form 1099s.
One of the first changes includes new tax documentation. Instead of receiving Form W-2 from your employer, you can expect to receive Form 1099-NEC, Nonemployee Compensation, from any client that paid you $600 or more during the year. And, unlike Form W-2, you don’t need to send a copy of Form 1099-NEC to the Internal Revenue Service (IRS) with your tax return. Your client sends the agency a copy as well.
But when it comes to completing your tax return, make sure you report the same amount of business income shown on all your 1099 forms. If a Form 1099-NEC is incorrect, request a corrected version from the sender. Reporting less total income than the total on your 1099 forms can result in receiving a letter of correction from the IRS.
2. Make sure you’re really a freelancer.
It’s not unheard of for employers to pay people as freelancers who are actually employees according to IRS standards. Doing so simplifies things for the employer because they don’t have to file payroll reports and pay payroll taxes. But, unfortunately, that’s not right.
If you’re really an employee, you should be treated as one. And that includes receiving benefits and payroll taxes paid on your behalf.
Generally, you’re an employee if the company tells you how to do your work, pays for your supplies or other expenses, and more-or-less treats you as a permanent employee. Check out the IRS site for more details.
If you think a company has misclassified you as an independent contractor when you’re actually an employee, you can file a Social Security tax form. Use Form 8919, Uncollected Social Security and Medicare Tax on Wages, to calculate and report your share of uncollected Social Security and Medicare taxes as an employee.
3. Report your freelance income on the right form.
The form used to report your freelance business income and expense activity depends on how the business is organized.
If you work by yourself and haven’t organized your business another way, you likely report freelance income on Schedule C with your Individual Income Tax Return, Form 1040.
You can also choose to file Schedule C if you set up your business as a limited liability corporation (LLC), and you are the only member.
4. Don’t forget state and local taxes.
Depending on the type of work you do, you may need to register your business with your state or locality. You generally must register if you use a business name other than your own name.
If your state or locality collects income tax, be sure to report freelance income on your state return. You also may need to file state excise tax and payroll tax returns, depending on your state laws and the type of income you receive.