Taxes for the Rookie Freelancer
by Susannah McQuitty
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So here it is: Your first freelancer tax return. You’re sitting there, ready to file your taxes like a model citizen – but you’re totally stumped. Instead of W-4s and W-2s, you’re dealing with these W-9s and 1099s. It all looks vaguely familiar, but the vagueness may seem to kick a bit of confidence out from under your feet. Let’s get that back, shall we? Time to refresh with a little Freelancer Taxes 101.
Starting with a W-9
Traditionally, when you get hired as a freelancer (also known as an independent contractor), your client asks you to send them a W-9. A W-9 is simply a formal request for your Taxpayer Identification Number (TIN) or Social Security Number (SSN), which your client will need when they file their own taxes. Having this information also helps your client keep up with how much and how often they’ve paid you.
Don’t mistake the W-9 for a shorter W-4, though: A W-4 tells a regular employer how much money to withhold for your taxes per paycheck. Your clients, however, can’t and won’t withhold your money; the responsibility to pay Self-Employment Tax out of your freelancer paycheck is on you.
Next up: The 1099-MISC
If you make more than $600 from a single client over the course of the year, that client should send you a Form 1099-MISC. This form lists how much you were paid over the course of the year, including the purpose of the payments (income, rental, medical payments, etc.). The 1099-MISC is, in a way, the self-employed person’s version of a W-2, and you’ll get a 1099-MISC from each client who paid you more than $600. You’ll use the information from the form (or forms) to fill out your own tax return, and your clients will send copies to the IRS to report what was paid to you.
Use the 1099-K for your online business
Let’s say you’re a freelancer, but you use “middle man” services like PayPal, Upwork, or Uber to receive payment, find clients and commissions, and get paid to go from A to B. Those platforms aren’t your employers, but they’re also not really employed by you: They’re known as Payment Settlement Entities (PSE). If you use or work for a PSE, you might get a Form 1099-K in the mail.
How does this work? Even though the PSE wasn’t your client, it was the actual payor. As such, the PSE is required to report the payments on Form 1099-K and send a copy to you and the IRS. Keep in mind, though, that the PSE is only required to send you a 1099-K if it processed over 200 transactions with you and paid you over $20,000 during the tax year. And, just like with the 1099-MISC, you are still responsible for reporting that income on your tax return if you don’t receive a 1099-K.
Speaking of self-employment tax …
Employers withhold taxes from employee paychecks throughout the year and send them to the IRS. It works differently for you as a self-employed person. You should be making quarterly estimated tax payments to the IRS based on your quarterly income. You can pay estimated taxes by credit card, by electronic funds transferred from your bank account, or by mailing a check. It doesn’t matter how you do it – what matters is that you do it. If you want to avoid a penalty when you file your taxes, keep up with your quarterly estimated tax payments (yep, Captain Obvious here).
Plugging it all in
So where is all of this information headed, anyway? In most cases, list 1099-MISC and 1099-K income on a Schedule C, which is the form used to report profit and loss from business on your tax return.
With your records in hand, whether from a 1099 or your own bookkeeping, you’re ready to roll when tax season comes up. If you’re just getting started as a freelancer, check out Toptal’s Ultimate Freelancing Guide to set yourself up for success—and when you come back next year to file your taxes with 1040.com, we’ll guide you through your self-employment income and expenses to claim all the tax breaks you can get.
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