Freelance workers are deemed self-employed in terms of the IRS. Freelancers must file their taxes as business owners, obtaining deductions, and facing self-employment tax. Freelance workers often work for multiple clients on a variety of projects. This form of employment carries many benefits on a personal level, but taxes can cause a few complications for newly independent workers. When considering freelance work, there are important things for individuals to consider during tax season.
The first step to avoid tax problems is gathering and reporting all income sources. This proves difficult when a freelancer has multiple sources of income and needs numerous 1099-NEC forms (a form per client). As a traditional employee, a worker would normally have to report a single W-2 per employer.
Being self-employed means identifying as both an employee and an employer at once. Not only do freelancers have to pay regular income tax, but they are also accountable for paying the self-employment tax (15.3% in 2020). This tax serves as a substitute for the Social Security and Medicare taxes automatically deducted from traditional employee paychecks.
When filing taxes, the utmost objective is the reduce liability to the minimum permissible amount. Freelancers often have greater business expenses than a traditional employee and are therefore often able to apply numerous tax deductions. These deductions must be ordinary and necessary for the operation of the taxpayer’s business.
Customarily, freelance workers can write off main expense categories. Individuals should keep in mind that items will not qualify for a deduction if they would have been acquired aside from the freelance business. The four main expense categories are:
Rent and utilities for portions of a home used as an office can be claimed. However, the office space must be exclusively used for self-employment.
Business meals with clients are deductible at a 50% rate. Additionally, the costs of traveling to a job site are deductible. All expenses must be necessary to the development of the business.
Classes and the cost of certifications, licensing, or registrations to enhance business knowledge can be claimed as expenses. This excludes classes and expenses that indirectly relate to the business or train the owner for a new career. Equipment and supplies that are needed to perform the position may also be claimed.
Maintaining business and personal expenses independently is the optimum route in avoiding any issues with the IRS. Gray areas for tax deductions can occur when freelancers try and split their expenses. As an example, some freelancers want to deduct their cell phone or internet service but only use these services for work partially. Responsively, there are different programs to help sort industry-specific deductions. A portion of freelance workers may find themselves in disagreement with the IRS regarding reported tax items. The most common way to resolve the claim is to file a tax appeal. Each year there is an untold number of over-assessments. Navigating the appeals process is not only confusing but tedious and time-consuming. Hiring a lawyer may be the next and most beneficial option to help understand taxpayer rights and manage these worrisome affairs.