If you've been doing any amount of online research about starting a career as a professional freelancer, chances are that an article like this will come up at some point. Whether it's finding out how to start or what to charge, there is one thing we all seem to want to find answers for: How do I deal with taxes?
You see, the truth is that if you decide to go into business for yourself, you're entering a new world where self-employment comes with its own set of rules. And while many people enter this world without any idea whatsoever, others realize quickly that they'd rather make their money by working for themselves instead of someone else.
For those who choose to become independent contractors (or "freelance"), however, things can get quite tricky when figuring out exactly what kind of income to expect each month. After all, most people rely on regular paycheck stubs every two weeks to determine whether they'll receive unemployment benefits or take home cash wages. But when you're an independent contractor, you won't be getting either of these — just checks periodically throughout the year as projects progress.
While this may sound daunting at first, once you learn more about how payroll works and figure out how to calculate your expenses, it becomes easier. In fact, we think learning the basics of accounting could actually help you earn more over time. So let's review the main pieces of information necessary to understand how to file taxes for independent workers.
When calculating how much you should save for taxes, consider three factors: 1) your current savings rate, 2) projected annual gross earnings, and 3) estimated federal withholding amounts. For example, let's say you currently contribute $1,000 per month toward 401(k) retirement plans and estimate earning around $30,000 annually. You also anticipate having no other deductions besides state and local taxes during the next 12 months. Using these numbers, here’s a quick calculation of how much you should stash away each month:
$30K / 52 = $583.54
In essence, that means that you'll probably owe Uncle Sam between $5835 and $11,170 in 2019 based on how much you earned last year. However, since you haven't yet started saving for taxes, you shouldn't feel too bad right now! Instead, use that number as motivation for increasing your contributions down the road. If you end up making less than expected, then you might even wind up owing more in taxes due to lower withholdings. On the flip side, if you exceed expectations, you could easily save thousands in future years. The key is to keep tabs on your finances so you can avoid paying penalties later on.
The above formula is good enough for estimating your tax bill but doesn't account for several important aspects of setting up your household as a freelancer. To ensure accuracy, you'll likely need to consult a qualified accountant.
Yes, they do. When you sign up with UpWork, you're automatically enrolled in the company's Self Employed program. This gives you access to a variety of tools designed to streamline your financial life. One such tool is called Earnestly which tracks your monthly payments and helps you prepare accurate estimates for upcoming tax seasons. It also allows users to view historical data about previous periods, including total earnings, average payment rates, and net profit margins.
Earnestly has partnered with QuickBooks Online to offer real-time reporting via a simple dashboard within the app itself. Since the service uses automatic bank deposits, it eliminates the possibility of double-counting fees. Once you've completed a project, you can request funds directly from clients using the platform. Of course, you can always contact them before requesting payment to ask if they prefer another method of receiving compensation.
With Earnestly, you can also monitor your spending habits, allowing you to better plan for upcoming bills and create budgets. It lets you add items manually or scan receipts straight from your smartphone. Plus, Earnestly offers detailed reports showing your overall revenue, profits, and expenses over various time frames. It also displays your balance history in USD, GBP, CAD, AUD and EUR.
But what happens after you graduate? Do you still have to submit taxes? Yes, absolutely. That's because under the U.S.'s Section 1441 definition, anyone engaged in self-employment must submit Form SS-8 Statement of Taxpayer Identification Number & Annual Income. Simply fill it out and send it to the Internal Revenue Service along with copies of W2 forms for the past five years. Also, be sure to check out our guide for filing taxes as a freelancer.
No, he/she doesn't. While being self-employed sounds intimidating, it isn't necessarily difficult once you break things apart. As long as you follow certain guidelines, you'll be fine. Remember, you aren't trying to run a traditional business, but rather a digital operation. Therefore, you only need to worry about tracking your personal income and expenses. Fortunately, there are plenty of apps available to help.
One great option is Expensify. With it, you can manage both travel and expense claims, plus invoice customers. Its free version includes features like creating customized invoices, adding attachments, sending emails, tagging expenses, etc., while premium upgrades provide unlimited claim submissions, PDF viewing, mobile support, etc.
Another popular choice among Americans is PayPal Business Login. Not only does it allow you to accept credit card payments for services rendered, but it also provides useful tools for keeping track of transactions. These include customizable templates, built-in budgeting capabilities, and a robust analytics system. Users can also enjoy a few extra perks, like discounts on Amazon Web Services, Google Cloud Platform, Heroku and Microsoft Azure.
Finally, you can try Gusto, formerly known as Paychex Flexible Spending Account Plan. This service specializes in offering health insurance reimbursements. Like other platforms, Gusto makes it easy to record your individual income and expenses. Then, simply upload your documents to the website whenever something changes. Most importantly, Gusto supports multiple family members' accounts simultaneously.
To make matters worse, the government agency responsible for collecting taxes on behalf of the American public is notoriously complex. Despite having existed for decades, the IRS continues to change policies constantly. Luckily though, they've recently simplified their process for handling freelance incomes.
As mentioned earlier, the biggest problem facing people transitioning to self-employment is knowing how to properly estimate their taxable income. Unfortunately, the IRS hasn't made things simpler. According to CNBC, the agency often asks taxpayers to prove their employment status by providing official documentation. For example, sometimes they require proof of Social Security numbers, pension statements, disability records, private medical insurance policy info, or bank deposit slips.
This is why experts recommend taking advantage of software solutions that automate the entire process. Such programs typically collect client files, store transaction histories, generate custom reports, and issue electronic returns while eliminating human error. For instance, TurboTax's HSA-compliant product automates the paperwork process and integrates seamlessly with Medicare and FSA accounts.
However, despite these advantages, the best way to protect yourself against potential tax liabilities is to hire a reputable CPA firm. They can handle all of the details for you, ensuring compliance with applicable laws. Furthermore, hiring professionals like CPAs is smart because they specialize in understanding unique situations like yours. Unlike ordinary accountants, they have extensive knowledge of special tax codes and regulations affecting independent employees. Lastly, they usually charge reasonable hourly rates, unlike large corporations who frequently charge exorbitant flat fees.
If you've been freelancing for a while, chances are that at some point or another, you were asked whether you had to report any earnings made via Upwork (formerly Elance) to Uncle Sam. The answer depends on how closely you work with clients who use Upwork—and it's more complex than many people think.
First off, let's start by defining what we mean when we say "freelancer." According to Merriam-Webster, a freelancer is someone who works independently without being hired by an organization or company. In other words, they sell their services directly to customers. Freelancers can also be referred to as independent contractors, which again means selling services directly to others, but not necessarily working exclusively for one specific client. While most freelancers will consider themselves to be independent business owners, there are still plenty of misconceptions about this industry. One major misconception is that because freelancers make money via online platforms like Upwork, they do not owe federal tax on those earnings. This simply isn't true.
The truth behind this myth has to do with something called passive revenue. Passive revenue refers to any kind of income earned from a trade or service where you aren't actively involved in making decisions regarding how much time you spend creating that particular product or earning that specific dollar amount. For example, if I'm writing content for websites all day long, my passive revenues would include anything I earn beyond the hourly rate I charge per article. If I decide to take on additional projects during slow times, then my total earnings for the entire year could easily exceed $100,000. However, because I only receive compensation for my efforts up until that point, none of these extra dollars should be taxed under current Federal wage laws.
In order to determine whether or not you must file taxes on Upwork earnings, first things first — does Upwork classify you as a full-time employee? Or a contractor? Not filing taxes doesn't automatically mean you won't owe taxes however. That said, the law is pretty straightforward. Here are just three examples of how Upwork determines its employees' status:
1.) You complete at least 40 hours of work within a calendar month.
2.) Your employer withholds state and local taxes from your paycheck and sends them over after receiving notice from both parties.
3.) You perform services for multiple employers throughout a single calendar quarter.
Now that we got that out of the way...do you have to pay taxes if you're freelance?
Yes! And no. It really depends on whom you're doing business with. As previously mentioned, if you're performing services for yourself, then you'll likely fall into the category of freelancer rather than employee. However, if you ever form an LLC or corporation specifically to run your own business, then your relationship becomes a bit different. There are several factors that go into determining whether or not you must pay federal taxes. First, we have to figure out exactly what kind of entity you formed. Then we have to look at two important questions:
Did you create the entity primarily to operate as a separate legal identity from your personal identity?
Are the profits generated solely from activities such as consulting or sales?
Let's break down each question individually so you understand why it matters. To qualify as a separate legal entity, the following criteria must apply:
You created the entity for business purposes. An entity cannot exist for the sole purpose of avoiding paying taxes. Additionally, entities may not be used to avoid legitimate obligations or responsibilities toward third party creditors. Keep in mind that in some cases, using an entity might actually increase your exposure to potential liabilities.
Your business was initially operated by individuals unrelated to you personally. A common mistake among new entrepreneurs is forming an S Corp to shield themselves from liability while running operations. Unfortunately, the opposite effect happens instead. Because corporations and limited liability companies offer unlimited liability protection, they attract riskier types of investors who often expect better returns. On top of that, since the vast majority of businesses are structured as C Corporations or Limited Liability Companies, you end up dealing with double taxation on profits earned from certain kinds of investments. These issues become even worse when considering real estate investment groups or startups.
To clarify, here are some guidelines for deciding whether or not you must pay taxes based on your chosen entity structure:
A Business Entity Structure Chart
Businesses are divided into four categories according to whether or not they generate enough profit to require payment of corporate taxes. Each one comes with unique advantages, disadvantages, reporting requirements, and benefits associated with keeping track of your finances. Here's a quick breakdown of each main category to help explain:
S Corporation - Created in 1953, the S Corporation offers limited liability protection to shareholders. With an annual limit of 100 shareholder participants, it's perfect for small teams looking to grow bigger. Since the corporation itself pays little to zero taxes, individual taxpayers remain liable for tax payments. However, unlike regular C Corps, S corps allow shareholders to deduct pass-through losses against taxable incomes.
C Corporation - Also known as Regular Corporate Income Taxpayers, C Corps serve as the primary option for larger organizations seeking greater financial security. Unlike S Corps, C Corps enjoy lower operating costs and minimal payroll expenses. Shareholders can elect to either pay taxes directly or reimburse themselves for the cost of withholding taxes from salaries.
Limited Liability Company - Similar to Limited Liability Partnerships, LLPs offer limited liability protection for partners. Just like C Corps, LLLP sharers can elect to either pay taxes directly or reimburse themselves for the cost of withholding taxes from salaries.
Partnership - Offered primarily as a vehicle for private equity firms, partnerships function similarly to LLCs. Like LLP's, partnership agreements typically provide broader liability protections compared to traditional corporations. Partnerships may also offer limited partner flexibility to participate in management duties along with offering the ability to purchase shares in the entity.
When it comes to figuring out whether or not you must pay taxes, Upwork takes great care to ensure you follow the rules. When calculating your net earnings, Upwork uses a standardized set of criteria for classifying various forms of income. Specifically, Upwork separates passive and active revenue streams to account for differences between both sides. Active revenue includes wages that represent direct payment for labor performed. Passive revenue represents any sort of income received from products or services rendered without having to physically interact with the customer. Examples of passive revenue include royalties, dividends, interest, rents, etc. Once Upwork completes your invoice, it provides you with a standard W9 Form to fill out alongside your check stub. Make sure to keep copies of all documents related to these transactions.
As a freelance worker, you've probably heard that it's important to keep track of what you earn so you can file accurate income reports for both yourself and any clients who hire you. But did you realize there are also other kinds of records you should maintain as well? One such record is keeping tabs on how much tax you actually owe when working for an employer or client via Upwork—and whether or not you're required by law to pay said taxes.
If you work full-time for someone else, chances are you'll eventually start getting paid under Form W-2 instead of something like a 1099 — but if you're self-employed, this isn't always the case. If you use upwork platforms like Upwork, Fiverr, People Per Hour, Freelancer, etc., then you may receive a 1099 at some point while doing side gigs or working on projects independently. This means you could end up having to pay more taxes than you would otherwise if you were employed by someone else. How exactly does this happen? And why might you want to avoid paying these extra taxes?
We spoke with several experts who shared their thoughts on the matter to help clear things up. Here’s what you need to know about Upwork taxes.
There are two types of workers who typically make money via Upwork: those who create digital products/services (like web design) and those who provide services normally performed by employees (think waiters, personal assistants). For regular employees, wages come straight out of their employers' pockets, whereas freelance gigsters will have to pay taxes themselves based on whatever rate they set for each project. The rates range between $5 per hour and $25 per hour.
Freelance workers aren't necessarily exempt from federal employment taxes either. According to one expert we consulted, "if [a] contractor receives payment over a period of days and weeks rather than just once during payroll hours, he or she must still include all earnings received within 120-day periods." So basically, if you put aside time blocks into which clients assign specific tasks to you, you'll likely have to consider these earnings separately. It depends on the circumstances of every individual situation though.
But even if you think you won't have to worry about being taxed because you're considered independent contractors, it never hurts to double check anyway. After speaking with attorney John Atherton, he warned against taking anything for granted, especially regarding state and local taxation laws. He explained that "the rules vary significantly" depending on where you live. In New York City, for example, only people who perform manual labor are exempt from sales tax on purchases made online. However, he cautioned that this varies across states and municipalities.
So far, we haven't discussed the issue of Social Security contributions yet. These payments go directly from the employee to his or her own employer and are often included in paycheck stubs. As long as you follow the same guidelines outlined above, however, you shouldn't fall afoul of the government here too.
That brings our discussion around to another kind of question: Do I really have to pay taxes from Upwork?
The short answer is yes, you do. That doesn't mean it's impossible to skip them altogether, though. Many companies offer discounts or incentives specifically designed to encourage their customers to submit their returns electronically. You can find similar programs offered by Upwork itself.
However, according to Atherton, many employers simply choose not to withhold enough funds from their paychecks to cover estimated taxes throughout the year. If this happens, your best bet is to catch the error before April 15th rolls around again. To ensure you do this successfully and without penalty, you should look into filing your return using Free File Fillable Forms. Not sure where to begin? Check out our guide detailing how to fill out and submit your return correctly.
What if my company offers me options to pay quarterly instead of monthly? Will that affect my taxes? Unfortunately, no. According to a spokesperson for Upwork, "[w]e charge fees based upon actual costs incurred. Therefore, regardless of frequency, we calculate fees based on total compensation earned by the provider."
You can rest easy knowing that if you're eligible for certain credits or deductions related to freelance work, you can take advantage of them. According to Sarah Oakes, writing coach and owner of Write On! Coaching & Consulting Services for Writers, "you can deduct expenses...from business meals...or travel away from home to conduct freelance activities." Just remember to document everything properly.
Finally, let's talk about those 1099 forms mentioned earlier. If you get one of these, you should definitely look into claiming the relevant expenses associated with earning them. We spoke with accountant Robert Schubert, CPA, MBA, founder of Accounting Without Borders, and co-author of TurboTax Small Business Tax Guide. According to him, "1099 workers can claim 100 percent of expenses claimed for mileage, equipment depreciation, vehicle expense deduction, cost of goods sold, office space rental, computer software subscriptions, and advertising expenditures." Once again, documentation plays a crucial role here. Don't forget to save receipts and invoices for future reference.
It sounds daunting, right? Fortunately, most of the legwork has been done for you already. All you need to do now is plug in numbers and see if you qualify for credit.
In addition to making good financial decisions, staying organized and knowledgeable about taxes goes hand in hand with ensuring proper compliance. With this knowledge in mind, you can better prepare next year's annual filings and hopefully lower your overall burden.
According to Schubert, the amount you pay in taxes largely depends on the type of job you're doing. There are four main categories: 1.) Self-employment (sole proprietorships); 2.) Employees of others (wage earners); 3.) Independent contractors; 4.) Professionals.
He explains further: "Generally, wage earners pay the highest percentage of income in taxes. Sole Proprietorship owners generally are least burdened by U.S. Income Taxes. Professional service providers usually pay the lowest percentages of income in taxes." Basically, you can expect to pay less in taxes if you fit into any of these groups.
Of course, none of this matters unless you actually decide to take part in it. If you believe your current situation falls somewhere outside of any of the aforementioned categories, don't fret. Simply consult your accountant first to determine whether or not you'd benefit from finding alternative ways to streamline your finances.
Additionally, you can research different cities to find areas where income levels tend to be higher than average. Then move there and try to settle down. The easiest way to do this is by checking out Zillow Real Estate listings in your area. From there, you can narrow down your search based on property values, population density, crime statistics, schools, commute times, median salaries and more.
No. While Upwork technically uses its platform to connect freelancers with potential clients, it does not report information back to the Internal Revenue Service. Instead, it works strictly off of estimates provided by users. Although you can use Upwork to negotiate prices, nothing is confirmed until after the fact.
A number of organizations exist solely to monitor the industry and collect data on behalf of clients. They publish figures like average hourly rates, typical completion times, and past performance histories. Based on this info alone, you can decide whether or not you feel comfortable hiring particular individuals. If you're worried about safety or reliability issues, sites like Verified By Experts can give you peace of mind.
To learn more about Upwork, read our article listing common misconceptions about the site.
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