How to report and pay taxes as a freelancer
The number of Americans freelancing is growing rapidly. According to the 2018 Freelancing in America report, the number of freelancers in the U.S. is now 57.3 million. That means 36% of the workforce has freelanced at some point in the past year.
As the number of freelancers increases, so does their economic impact; they currently contribute approximately $1.4 trillion annually to the economy. Freelancing continues to be a side-gig for many workers, but there is strong evidence that many of these folks would be interested in making freelancing their full-time job. In the report, 61% of freelancers said that they are freelancing by choice rather than necessity.If you’re freelancing for the first time, or just starting to consider the possibility, one of the likely questions you’ve been asking yourself is “Do I need to report freelance income on my taxes, and if so, how?” We’ve got you covered—keep reading to learn the answers.
I have a full-time job; do I still have to report income from freelance work?
The short answer is this: “Most likely, yes.” The income you earn for freelance work is considered “non-employee compensation.” You are required to report all non-employee compensation to the IRS if the total (from all sources combined) reaches a certain threshhold. As of 2019, that threshold is $400. For example, if you received $200 for a graphic design project and $300 for a social media gig, then you must report that income because you have earned $500 in non-employee compensation.
Why is the threshold so low? If you work for an employer, your employer will withhold money from your paycheck to cover Social Security and Medicare taxes. They will also pay a portion of those taxes for you. If you’re self-employed, however, you’ll have to pay self-employment tax.
I don’t have an incorporated business. Do I still need to file a Schedule C?
It depends. According to the IRS, the Schedule C is for reporting income or loss from a business you operate or a profession you practiced as a sole proprietor.
If you did freelance work, you work alone (rather than with a business partner), and you earned $400 or more in non-employee compensation, you will need to report it on a Schedule C. If you have under $5,000 in business expenses, you may be able to use Schedule C-EZ. Assuming you’re taxed as a sole proprietor (which most freelancers are), you’ll complete the Schedule C and then the net profit or loss is then reported on your personal income tax return.
If you don’t have an incorporated business but you do work with a business partner, you’ll use a form Schedule K-1 instead of a Schedule C.
Will I get a 1099-MISC? Do I need to send them as well?
You should get a 1099-MISC for each employer who paid you $600 or more for freelance work. Employers are required to send out these forms by Jan. 31; once you receive your 1099s, you’ll use them to fill out your Schedule C.You might also have to send out your own 1099s. If you pay $600 or more over the course of a year for business-related services (including rent), you should send them a 1099-MISC. Read more about the IRS requirements on their website.
Am I eligible for small business deductions as a freelancer?
If you received $400 or more in payments for services you performed, you may have the opportunity to take business deductions for certain business expenses. For example, you can deduct consulting or legal fees, purchases of business supplies or equipment, advertising costs, and business office expenses. All of these deductions reduce your net income, which in turn reduces the amount of taxes you’ll owe.
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