According to a study commissioned by Upwork in conjunction with the Freelancers Union, in 2017 there are over 57,000,000 freelancers, or "independent workers" in the United States. This number totals around 36% of the working population in America! The number of freelancers and self-employed individuals is expected to grow to a whopping 50% in just a few short years. Thanks to the new Gig Economy, millions of people that otherwise wouldn't have gone into business for themselves are suddenly driving for Uber, Lyft, Doordash and more. It's an awesome thing to see, but not everyone is prepared for the shift from W2 to 1099 worker and the taxes that come with it! At Everlance we want to help new freelancers understand the difference and some of the requirements for paying taxes as a freelancer. As always, this post does not constitute tax advice and we urge anyone with specific tax questions to consult a tax professional.
Income: How Freelancers Earn Money
Those that are self-employed face a number of challenges compared to traditional W2 employees. Finding work and getting paid on time can be one of the trickier parts of freelancing. As an employee, all of this is taken care of for you. You have a job and set duties you perform on a set schedule for an agreed upon amount of money and a reliable payday. As a freelancer or independent contractor almost none of the above is guaranteed! If you freelance for Uber as a driver you may get to pick your hours, but you can't choose your pay. If you freelance as a photographer you may find long droughts in between bookings. If you freelance as a business consultant you may have different rates for each company. The work duration may be longer or shorter. You may not see payment until 30 days after your job is complete. These are just some of the hazards freelancers face when earning money as a self-employed individual, and the hard work isn't done yet. There are still taxes to pay! Thankfully freelancers have an ace up their sleeve, expenses, and deductions! Unlike regular W2 employees, a lot of the money you spend towards earning money is deductible, which certainly helps offset the amount you owe.
Filing Taxes: What You Need To Know When You're Self-Employed
The difference between filing taxes as a self-employed individual vs. employee is quite large. Employees have very few deductions, their taxes are taken out with each paycheck & they don't owe self-employment tax. As a freelancer, you have to do all of that and more. When you work as a freelancer, no matter who or how many people you work for if you've earned more than $600 in the previous year you should get a 1099. This includes revenue earned from individuals as well as companies. You may find that not every individual or company sends you a 1099. That does not mean you don't owe taxes on the money you earned! It's absolutely your responsibility to accurately document the amount of money you earn every year and the taxes that are due on it. When you receive a 1099 it makes it a lot easier to see exactly how much was paid to you, but again, not every individual/company sends these out. They may get lost in the mail, sent to the wrong address or in the case of some individuals - they may have no idea they needed to send these to freelancers they've paid. This is why accurate revenue tracking is important, and at Everlance, it's one of our most powerful features!
Self-Employment Tax: What Is This?
We literally can't explain self-employment tax any better than the IRS does. This is the official source, and it's highly suggested that you read up on it. In a nutshell, Social Security & Medicare Tax is lumped into one name - Self-Employment Tax.
Self-Employment Tax Rates For Each Part
- 12.4% for Social Security: The social security tax of 12.4% applies to the first $127,000 in earnings.
- 2.9% for Medicare: The Medicare tax of 2.9% has no limit on earnings.
For more information, see IRS Tax Topic 554: The Self-Employment Tax.
Quarterlies (Estimated Taxes)
Requirements: If you've estimated your taxes and expect to owe more than $1,000 you're required to file quarterly estimated payments through Form 1040-ES.
How to file: Are you ready to file your 1040-ES? You have 5 options.
- You can use a tax credit from a previous year, if available.
- You can mail your 1040-ES and a check directly to the IRS.
- You can use the EFTPS online payment system (fastest/easiest).
- You can pay via bank wire if you arranged that through your tax preparer or tax software.
- You can pay via credit/debit card over the phone. There will be a small processing fee for this ability.
When to file: Estimated tax payments are due four times a year according to this schedule (or the next business day if the due date is a legal holiday or weekend day):
- April 15th - for earnings from January 1 through March 31.
- June 15th - for earnings from April 1 through May 31.
- September 15th - for earnings from June 1 through August 31.
- January 15th - for earnings from September 1 through December 31.
Itemize Business Expenses: What Can Freelancers Deduct?
Here's a list of what freelancers can typically deduct. Not everything on the list may apply to you, but it should give you a great idea of the types of things that other self-employed individuals are deducting in the course of the profession.
- Advertising: Did you advertise to gain new business? If so, this is 100% deductible.
- Business Insurance: If you have business insurance that's deductible!
- Car Insurance: This is more directed towards those that drive for a living.
- Cellphone: Do you use a cell phone primarily for business? There are deductions you can take.
- Certification/Continuing Education: While you can't deduct your 4-year degree, you can deduct 100% of any certification or continuing education courses that are required to maintain a job.
- Fuel: If your vehicle is required to earn money, the fuel used may be deductible.
- Health Insurance: Profitable Self-employed individuals are allowed to deduct their health insurance costs.
- Home Office: This is a bit trickier. Please refer to the IRS page on home office deductions.
- Legal Services: Did you hire an attorney? You can deduct this!
- Licenses/Licensing: You can deduct 100% of your licensing costs.
- Meals: You can only deduct 50% of the total cost of business meals.
- Mileage: Use Everlance to get the standard mileage rate for every business mile you drive.
- Parking/Tolls: This really adds up for people in the ridesharing business.
- Professional Services: Hire an accountant for your taxes? you can deduct 100% of that.
- Travel/Entertainment: You can only deduct 50% of the total cost of travel & entertainment.
- Union Dues: You can deduct 100% of your union dues.
- Wages (employee/contractor): Did you hire help? All wages paid to employees/contractors that paid are deductible.
It's probably clear by now that taxes are a little more difficult for you as a freelancer than it is for regular employees. That's OK, though, because the tradeoff, when done correctly, is that you're your own boss. You may have a little more paperwork to do, but in the end it's worth it because you have more freedom. We created Everlance for freelancers just like you!
Not only is Everlance the best and easiest to use automatic mileage tracking app in the world, it's so much more. Thousands of Uber drivers, Photographers, Real Estate Agents, Consultants & Sales Professionals use Everlance every day. In fact, we track over 1,000,000 miles per day! Mileage tracking is just one part of Everlance. We also give our users the ability to track their expenses and revenue. You can track every expense and all your revenue in real-time manually, or if you upgrade to Everlance Premium ($5/mo) you can link your bank accounts to Everlance and we'll import them for you! At any time you can view your data and export it to your favorite tax software and hand it over to a tax preparer. We've helped over 100,000 freelancers save hundreds of hours each year, and you can get started for free.