Freelancers generally find they have a more difficult tax situation than most employees. This is partly due to the fact that they are fully responsible for the accounting of their business income and expenses as well as the fact that they are responsible for making their own estimated payments throughout the year. Whereas employees (W-2 recipients) have their withholdings automatically taken out of their paycheck and remitted to the government by their employer, freelancers do not have this luxury and must remember to remit their payments with their quarterly installments. As long as they pay 100% of what they paid last year or 90% of what they will owe this year, no penalty will be assessed.
Included within these quarterly payments, self employed freelancers must pay self employment tax, which is the usual 7.65% employees pay, plus an additional 7.65% for the employer half (which is deductible as a business expense).
The form 1099-MISC should be provided by any company a freelancer did contract work for. The income reported on these forms should be reported on the tax return along with any other income received. Businesses are allowed to deduct anything that may be considered “ordinary and necessary” in their regular course of business. In the event of an audit, substantiating these expenses may be necessary, so freelancers should keep copies of their receipts and expenses.
Get the latest posts delivered right to your inbox