by Matt Wilson / ⠀Startup Advice / May 16, 2013
There are so many advantages to being your own boss. From the ability to set your own hours to the chance to work in your jammies, working as a freelancer has never been more popular than it is today. Transitioning into a freelance career or becoming your own entrepreneur also gives you a way to live free and clear of depending on an employer for a job and your income. But no amount of raw talent or client demand can help you if you don’t take care of some business basics such as bookkeeping, accounting and tax filing. Here are some tax basics that can make or break your business.
Understanding the Freelancer
As a freelancer, you have the ability to pick and choose the projects you want to accept. You can define your skillset and business focus as broadly or narrowly as you choose. If you want to work 30 hours per week or 80 hours per week, you can choose to do so. You can do all of the work yourself or outsource some of it to contractors you hire to help you. With all this freedom and flexibility, however, you may find yourself with some complicated questions to answer come tax time. Even if you have earned your online mba one year degree, you may still want to hire a bookkeeper or accountant to help you with your taxes. To help you decide, here are the basics you need to know.
- 1099s.
- How to file quarterly SE (self-employment) income taxes.
- IRS (Internal Revenue Service) Schedule C and how to fill it out correctly.
1099s 101
The first tax basic to understand is the 1099. Basically, you need to know what it is, how it works and what to do if you need to send or receive it. The 1099 is a tax form that is used to record income paid to freelancers or independent contractors; it is an earnings statement for people who don’t have taxes regularly deducted from each paycheck. It is similar to the W-2 forms that employees receive at year-end. As a freelancer, you will receive a 1099 at the end of each year from each client you worked for. If you do not receive a 1099 from a client, you can either contact them to get one sent to you or you can record the income you earned from them in a separate column on your IRS form 1040 at tax time. You may also need to send 1099s if you hire independent contractors or freelancers to help you fulfill some of your work overflow. If you need to send a 1099 you must send it by a certain date at the beginning of each year (the deadline date varies so check the IRS website).
Quarterly Self-Employment Taxes
The next tax basic that all freelancers must understand is how to calculate and file quarterly self-employment taxes. Once the IRS recognizes you as self-employed, you should automatically receive a packet each year with four envelopes and the SE worksheet with instructions and date deadlines. For the first year you will want to download this information from the IRS website. You can use the worksheet to calculate your estimated quarterly tax payments and either pay online or send in a check with a payment voucher. It is important to pay at least as much tax as you paid the previous year to avoid getting penalized.
IRS Schedule C
Finally, as a self-employed person you can take tax deductions for eligible business expenses. You will use IRS Schedule C to calculate how much you spent on business expenses during the prior calendar year and then add this information back into your IRS 1040 to calculate your total taxes. The Schedule C form also comes with a worksheet to help you identify which expenses are eligible and what percentage (if not 100 percent) can be deducted.
By understanding these “big three” tax basics you can start your career as a freelancer on the right foot and avoid challenges like IRS audits, paying back taxes or penalties and having to file tax extensions. You may also decide to hire a bookkeeper or an accountant to help you at tax time, which is often wise for the first year at least.
Marla Chance is a solopreneur who recently graduated with her MBA degree. She has her own business as an accounting consultant for small to mid-sized companies. She also teaches a community college course on freelancing basics.
Image Credit: Shutterstock.com
freelancerMarla Chancetax filing
FAQs
As mentioned, solopreneurs run their own businesses by offering products or services. A solopreneur may offer coaching or a course on how to write blogs, for example. In contrast, freelancers, such as content writers, offer their skills on a per-project or per-hour basis to clients.
Am I freelance or self-employed? ›
As opposed to self-employed workers who initiate their own projects, freelance workers typically follow the requests of clients. Freelancers tend to work alone. They often work the hours they wish and take on multiple jobs with different clients. The term self-employed is often associated with business owners.
How do I know if I'm a freelancer? ›
A freelancer is a self-employed person who:
- Pays their own income tax, known as self-employment tax.
- Doesn't usually have employees, but may outsource work for specific projects.
- Has full control over where they work (e.g., they'll often work remotely) and the work hours.
As a self-employed individual, generally you are required to file an annual income tax return and pay estimated taxes quarterly. Self-employed individuals generally must pay self-employment (SE) tax as well as income tax. SE tax is a Social Security and Medicare tax primarily for individuals who work for themselves.
What is the description of a freelancer? ›
A freelancer is an independent contractor who earns wages on a per-job or per-task basis, typically for short-term work. Benefits of freelancing include the freedom to work from home or from a non-traditional workspace, a flexible work schedule, and a better work/life balance.
Is a freelancer a business owner? ›
Freelancer: a person that does particular pieces of work for different organizations, rather than working all the time for a single organization. – Cambridge Dictionary. Business owner: individual who owns a business entity in an attempt to profit from the successful operations of the company. – Business Dictionary.
Do freelancers pay taxes? ›
If you've earned more than $400 in net self-employment income — even if it's just from a side hustle — you must file taxes. With most freelance income, you report it on Form 1040 Schedule C, as part of your personal tax return.
When can you call yourself a freelancer? ›
If the projects you work on are for someone other than the person or company paying you, you are freelancing. For example, if an agency contracts you to work on projects for the agency's clients, you are working as a freelancer.
Are freelancers considered unemployed? ›
"An individual who is self-employed may nevertheless be unemployed . . . However, if such an individual is in receipt of income for services performed in an independent business, such income constitutes 'wages' . . ."
How to use freelancer as a beginner? ›
Becoming a freelancer in 7 easy steps
- 1) Define your service & offering. ...
- 2) Find your target audience. ...
- 3) Develop a pricing structure. ...
- 4) Create your portfolio with past jobs. ...
- 5) Write a great proposal. ...
- 6) Create a relationship with your client. ...
- 7) Continue developing your skills.
- Use every part of your profile to showcase your skills.
- Select a professional profile picture.
- Showcase your expertise in the title and overview section.
- Create an outstanding introduction video.
- Highlight your best work in your portfolio.
- List your certifications.
- Include your employment history.
How to Start Freelancing (Even When Working Full-Time)
- Define your business goals.
- Find a perspective niche (and stick to it)
- Identify target clients.
- Set your freelance rates.
- Create a website (and portfolio)
- Find your first client.
- Expand your network.
- Balance your full-time job with your part-time freelancing side gigs.
Freelancing and side hustles are two prominent aspects of the gig economy. Freelancing involves working on a project or contract basis for multiple clients or companies, while a side hustle refers to a secondary job or income stream that individuals pursue alongside their primary employment.
Do freelancers own their work? ›
As a freelancer, you own copyright in your work
First, it is important to know that under U.S. copyright law, when you work as a freelancer (or “independent contractor”), you are the “author” and copyright owner of your work, even though your client is paying you to do it.
What is better than freelancer? ›
The short answer is Yes
Yes, Upwork is better than freelancer.com. The sheer scale, number of jobs, and ease of application to jobs are superior to freelancer.com. Upwork is also more suitable for new freelancers, primarily because its more equal opportunity compared to its competitors.
