36% of freelancers do so full time – this is an 8% increase from 2019. How does hiring more freelancers affect your taxes?
The freelancing industry in the U.S. is now a $1.2 trillion economy. This was a rising trend before the coronavirus pandemic hit, but now that it’s here and sticking around for a while, the push towards freelance and remote work has accelerated even more.
Do you work with freelancers currently? Are you considering working with freelancers at an increased rate or for the first time this year? If the answer is yes, your tax filing process will likely be changing this year.
Freelancers, when filing their own taxes, are often taught to think of themselves as their own business. But what does that mean for your business’s taxes when you hire them?
The addition of the form 1099-NEC has changed the way businesses that hire freelancers and independent contractors will report those payments in the tax year 2020. Let’s go through some common changes and misunderstandings.
What is a Freelancer or Independent Contractor?
Your employees, freelancers, independent contractors – they all work for you, so why aren’t they all treated the same from a tax filing perspective?
The big difference is in the relationship to your business. Employees (whether full- or part-time) have their income taxes withheld or matched by their employer: independent contractors and freelancers, since they are considered a separate entity, must set that money aside themselves. The hiring company or business does not do that for them.
Freelancers also often set their own hours, use tools they purchased or acquired themselves, complete their work in whatever way they prefer, and they can also refuse work. Full employees are not able to do these things without approval from your business managers or supervisors.
Do you need help filing as a freelancer or independent contractor? Check out this blog post instead.
What Tax Forms Are Needed?
At the end of the year, you or your business will give each of your employees a W-2, which shows all the income, payroll, and other taxes both you and your employee paid in for the tax year.
Freelancers don’t receive a W-2 from your company, they will (typically, though not always) fill out a W-9 which will help your business create a 1099 form. The great thing about these forms is that they help streamline your workload while also organizing freelance tax information in a way that is easy to understand.
W-9: Helpful, But Not Required
IRS Form W-9 is filled out by the freelancer to provide the paying business the necessary information for filing their 1099s: legal name, address, TIN (taxpayer identification number), and SSN. If you are the business that is hiring an independent contractor or freelancer, you should request this form from the freelancer before they start their contracted work for you.
It’s good to note that a completed W-9 is not mandatory for tax purposes – it is just the best way to safely give and receive sensitive tax information and to circumvent issues with false information.
Before this year, freelance work payments and other “non-employee compensation” would have been filed under Box 7 of the 1099-MISC. But for the tax year 2020 and beyond, the renewed 1099-NEC is required to be filed when reporting freelance and independent contract wages, materials, and other compensation or payments. The IRS’s goal was to simplify filing in regards to the growing volume of freelance and independent work being commissioned by companies of all sizes.
If you’d like more information on the dos and don’ts of filing form 1099-NEC, we have an article for that too.
For help with all your 1099 filing needs, sign up for a free eFile360 account.