For Independent Contractors AND The Companies Who Hire Them
An Overview of Tax Filings for Freelancers
In 2014, 91 million 1099-Misc forms were issued by employers, up nine million since 2010. These 91 million tax forms represent individual contracts, not individual workers. In other words, since an independent contractor can, and often does, sign multiple contracts in a given year, there are not 91 million Americans working in the gig economy. The figure does, however, indicate the scope and upward trend of freelance work in the current American economy.
Rather than the standard W-2 form, freelancers receive 1099-Misc forms from the companies they contract with throughout a given year. Like the W-2, the 1099-Misc is a form provided by employers to workers that summarizes the wages earned and taxes withheld from an individual. The difference? There are a few important ones, but the bottom line is this: A 1099-Misc is the W-2 equivalent for independent contractors. W-2 forms are for employees; 1099-Misc forms are for independent contractors. A 1099-Misc is used to account for the miscellaneous income that freelancers earn over the course of a year.
Why Use This Guide?
As a standard employer or employee, taxes are relatively simple. Employers submit a W-2 to an employee, and the employee uses the W-2 to fill
out either a 1040-EZ or a 1040A tax form. For freelancers, and employers who contract with
them, tax filings are more complex for two reasons:
- The varying classifications of freelance work.
- The many forms required to file taxes
properly for both contractor and employer.
Use This Guide?
All freelancers that take home more than $600 and any business professional involved in an industry that employs freelance work, which pays out more than $600 per year in contract work, will find useful information in this guide. Think of it as your digital handbook to freelance tax information.
How To Use
We think of this guide as a digital post-it note for freelancers and their employers during tax season. It offers detailed instructions on completing and filing the main tax forms. Use this guide to educate yourself well in advance of tax season so you can properly and efficiently file your taxes come April.
Meet Our Authors
A Tax Guide for Independent Contractors and the Companies Who Hire Them is a go-to resource for all freelancers and their employers, co-authored by Justin Gomer and Jackson Hille.
Justin Gomer is a Lecturer at the University of California, , and soon-to-be author of two books.
Jackson Hille is a Content Associate at FormSwift and the 2013-14 Departmental Citation Recipient in American Studies from University of California, .
Top Tips and Rules for Employers & freelancers
This guide considers both sides of the employer/contractor relationship and provides an informative breakdown for both parties, so that when taxes are due next year, you have a single resource that prepares you to submit all of the requisite paperwork with your accountant or tax filing service. In other words, whether you are an employer or freelancer, this guide is your one-stop shop come tax season.
How Do I Determine If a Worker is an Employee or Independent Contractor?
According to the the distinction centers around three variables:
1 Behavioral Control
Behavioral Control, according to the IRS, “covers facts that show if the business has a right to direct and control what work is accomplished and how the work is done, through instructions, training, or other means.”
2 Financial Control
Financial Control, according to the IRS, “covers facts that show if the business has a right to direct or control the financial and business aspects of the worker's job.” This includes, but is not limited to, the reimbursement of business expenses, how the worker is paid, and the ability for the worker to realize profit or incur a loss.
3 Relationship of
Relationship of the parties, according to the IRS, covers the specific details of the relationship between the employer and worker including: terms of contract, benefits and compensation, permanency of the relationship, and how integral the services provided by the worker are to the daily operations of the company.
What Form(s) Do I need to Order From the IRS?
You need to order a 1099 form from the IRS, along with a 1096 transmittal form, which you can do for free by following the instructions on the following page:
When Should I Order Them?
You must issue a 1099 to its recipient by January 31st of the year in which you are filing your taxes. For example, a 1099-form for a contractor that worked for you in 2015 must be issued to the contractor by January 31, 2016. Additionally, You must send the red copy of the 1099-form to the IRS by the last day of February by mail, or by March 31 if you are doing so electronically.
To Whom Do I Send a 1099-Misc Form?
This is an important question for both employers and contractors. The key is to remember the “600” rule: employers must issue a 1099-Misc form to anyone that is paid $600 or more in “rents, services (including parts and materials), prizes and awards, or other income payments.”1 A contract that totals less than $600 does not require a 1099-Misc.
1099-Misc Forms must therefore be completed and sent to any contract worker you paid over $600, or anyone who received more than $10 in royalties. This includes any lawyer you paid over $600, even if she or he works for a law firm. All lawyers are considered contract workers, so you must complete a 1099-Misc for any who received more than $600 in payment.
What About Vendors?
If you plan to hire a vendor for contract work over $600, request a W-9 form from the vendor beforehand. By incorporating this as part of your hiring protocol for contract work, you will get an early start on collecting required information—such as the contractor’s mailing information and Tax ID number—for the subsequent 1099 filing.
Requesting a W-9 in advance will also enable you to avoid the complex scenario of backup withholding, which requires you to set aside 28% of the payments you paid to an independent contractor if you do not have his or her tax info during filing time.2
How Do I File My Taxes?
As a freelancer, you do not generate your own 1099-Misc form. Instead, the company who contracted with you furnishes the form in January of the year after you complete the contract. This means that if you contracted with multiple companies you will receive multiple 1099-Misc forms (one from each company). If you completed multiple projects with a single outfit, they will send you a single 1099 that includes all of the work you completed with them. The exception to this rule is if you received less than $600 in payment from a company. Labor that amounts to less than $600 does not require a 1099.
Your responsibility, then, is to use the info from the 1099(s) you receive to fill out your income tax forms and send it to the IRS along with those other customary tax forms.
What Are My Tax Obligations?
Freelancers are responsible for both self-employment and income tax. Generally, the amount of income subject to self-employment and income tax equals 92.35% of your net earnings (net earnings = income - business expenses). While self-employment taxes are collected annually, income taxes are collected on a quarterly basis, due on the 15th of April, June, September, and January.
How Can I Stay On Top of My Tax Payments?
Plan ahead and keep detailed records. Set aside money each month not just for your end of year taxes, but for your quarterly payments as well. Additionally, there are a number of write-offs for the expenses you incur—a portion of your mortgage/rent, utilities, home office, etc.—depending on how you structure your work. Keeping detailed accounting records of these costs will ensure you can minimize your tax burden at year’s end. So itemize all of your expenses and commit to a thorough system of recordkeeping.
What If I Am a Writer or Graphic Designer, or
Have Low Business Expenses/No Employees?
Schedule C-EZ is primarily for writers and graphic designers that meet the following criteria:
- Business expenses are less than $5000
- Have no employees
- Have no merchandise inventory (Etsy Shop owners must use Schedule C because of this provision)
- Are not using depreciation nor deducing the cost of their home.
Which Expenses Should I Keep Track of to Write-Off?
Everything. Seriously. Here’s a list to get you started:
- business & health insurance
- travel costs
- meals with clients
- computer repairs
- vehicle costs (repairs, gas, etc.)
- business expenses like office supplies,
business cards, etc.
- interest on business related credit cards
- lawyer fees
Where On My Tax Form Do I Declare the Above Expenses?
You will enter deductions from the list above in either Schedule A or Schedule C of your 1040 tax form. You’ll record items like interest paid, insurance expenses and charitable gifts in Schedule A, while your expenses—vehicle, insurance, education, travel, events, home office, supplies, meals, etc.—will go in Schedule C.
Resources & Further Reading
- A breakdown for employers of the requirements, exceptions and procedures of issuing 1099-Misc forms.
- Detailed instructions for freelancers on how to process and file your 1099.
- An excellent resource that lists and offers detailed instructions on how to claim 10 tax deductions for which freelancers commonly qualify.
- A list, with detailed explanations, on commonly overlooked tax breaks for freelancers.
- More tax break information for the self-employed.
Are you a business that relies on freelancers? Are you a freelancer with tax questions? If you answered yes to either question, then you need to read, A Tax Guide for Independent Contractors. This practical guide, presented by FormSwift, provides the answers you need to common tax questions. You’ll learn about 1099s, how to determine if someone is an employee or an independent contractor, and how to file your taxes. Be prepared for tax season.