U.S. Freelancers: The Tax Man Is Coming
By: Brynn Mahnke
Tags: Freelancing, Planning, Money, Personal Finance, Taxes

U.S. Freelancers: The Tax Man Is Coming

Don’t ignore him. It’s not too late to get ready!

Photo by sheri silver on Unsplash

Let me begin by saying that I am not an accountant, nor do I play one on TV. My number one piece of advice is to talk with an actual accountant who can speak into your exact situation and help you figure out exactly what you need to do right now.

Now. About taxes.

If this is your first year freelancing, you may not have thought about the fact that Uncle Sam still needs his piece of your tasty income-pie. I spent years working in a large company's payroll tax department, and I’ve filed payroll taxes in all fifty states. So, though I’m not an accountant, I have a little bit of knowledge in this area.

When you work for an employer, they withhold taxes from your check. They withhold Social Security, Medicare, state income tax, federal income tax, and possibly local income tax if you live in an area with it (looking at you, Pennsylvania!).

Your employer sends those amounts to the government on your behalf. At the end of the year you do a tax return to figure out if what they sent was the right amount, and you either pay a bit more if they didn’t withhold enough or get a refund if they withheld too much.

If you’re freelancing, there’s no one to withhold or send the money for you.

That doesn’t mean you don’t have to pay! It just means that when you get that check from a client, it’s not nearly as big as it looks.

Social Security

As an employee, everyone pays a tax of 6.2% for Social Security. What you might not know is that your employer matches your contribution. This amount isn’t withheld from your check, but it’s a cost of having employees.

As a self-employed individual, you get the joy of paying both the employer and the employee portion of Social Security. That alone amounts to 12.4% of your income! The good news is that you only have to pay the tax on the first $137,000 you earn, at least in 2020.

Medicare

The Medicare tax rate is 1.45%. And, again, employers match this amount; if you’re self-employed, congratulations on paying both parts of this tax. Take another 2.9% off of your income, dearies!

Federal, state, and local income taxes

These taxes aren’t nearly as straightforward as Social Security and Medicare, but it’s still important to try to estimate what might be due. Again, speak with an accountant. You may need to make quarterly estimated tax payments or regular deposits based on your estimated income for the year.

I’m serious about this: you could be subject to penalties and interest if you do not make your deposits when you’re supposed to. Even if you pay the tax due at the end of the year, you could receive a penalty because you didn’t pay it early enough.

Tax Forms

When you work for an employer, they are required to send you a Form W-2 by January 31. You use this to file your taxes.

When you’re freelancing, companies who have paid you more than $600 are required to send you a Form 1099. You should know that they send a copy to the IRS as well.

The IRS is famously backlogged, so they probably won’t come after you on April 16 if you don’t file your tax return. It might take years for them to catch up with you. But, if you get a 1099, trust that they got it too, and they expect to see a tax return where you have claimed that income and paid your taxes.

Even if you were paid less than $600, it’s your responsibility to keep track of your income and claim it. If you’ve earned over $400 from self-employment, you should claim it on your taxes.

Deductions

You should also keep track of your deductions. Again, speak with an accountant, but this could include things like a computer, fees charged by platforms such as UpWork, classes, office supplies, a home office deduction, etc. It might seem a bit onerous, but you’ll be glad to take the deductions when it’s time to reckon up your taxes due.

Personally, I keep track of all of my income and expenses in a spreadsheet. I am running a very tiny operation right now, but it doesn’t matter because since I’ve earned a few thousand bucks on a single platform, the IRS will definitely know about it. It’s my responsibility to keep track of my deductions and lessen my tax burden.

Resources

First, find an accountant. Seriously. Now is a great time to talk to one. After January 1, they will start getting busier. You still have time this year to fix anything you may have messed up, or implement some changes that might save you money when tax time comes.

Second, the Internet is full of wonderful resources which can help you figure this out. The IRS website has copies of all of the federal forms you need. If you have a question about federal taxes, I can almost guarantee that it has been answered in either the form instructions or a publication on their website.

Third, use other resources on the Internet wisely. Hopefully, you’ve learned by now that you can’t believe all you read on the Internet. Use good judgment, and when in doubt, talk to an accountant!