Tax Documents That Every Freelancer and Contractor Needs
Working as a freelancer or independent contractor can be challenging. You have to juggle client needs and provide a great product or service. Freelancers must also carefully review their business records, in order to file an accurate tax return.
Here are the tax documents that every freelancer and contractor needs. First, let’s define an independent contractor.
How to determine your freelancer status
The IRS defines a worker as an independent contractor using three different criteria:
- Behavioral control: Does your company have a right to control what the worker does and how they perform the job?
- Financial control: Does your company have a say in the material aspects of a worker’s job? In other words, do you decide which expenses are reimbursed or who provides necessary tools and supplies?
- Contractual Relationship: Is there a written contract? Are benefits such as pension, insurance, and vacation, or sick days a part of that contractual obligation?
When these three criteria are met, the IRS considers the worker an employee of your company, and you are responsible for filling out Form W-2 and paying your share of the FICA taxes.
If these criteria are not met, the worker is an independent contractor who is responsible for paying their own taxes. These individuals receive a 1099-NEC.
To keep the discussion simple, we’ll use “freelancer” to refer to both freelancer and contractors in the rest of the article.
Companies use Form 1099-NEC to report income earned by people who work as freelancers. For tax year 2020, your customers must send you a 1099 form by February 1st of 2021.
Attach copies for your 1099-NEC forms to your tax return. Employees, on the other hand, use a W-2 form to report income to the IRS.
If a business pays a freelancer less than $600, the company is not required to provide a 1099-NEC form. Keep in mind that freelancers must pay taxes on all earnings, regardless of the dollar amount paid by a client.
Filing Taxes Without a 1099 Form
Here are the steps to file a tax return, when you don’t receive a 1099 from all of your customers:
Check for your 1099 Forms
Gather all of the forms that you received from customers during the year.
Review your bank deposits
Review your deposits, and compare your 1099 documents with the customer deposits. If you received a client payment and not a 1099, the dollar amount must still be posted to your tax return.
Complete Schedule C
Freelancers post business revenue and expenses to Schedule C of the personal tax return (Form 1040). Revenue less expenses equals net income (or profit), and the freelancer’s net income is added to other source of income on Form 1040.
All of the freelancer’s income must be posted to Part 1, line 1 of Schedule C (Gross receipts and sales). This includes income reported on 1099 forms, and payments under $600 that did not require a 1099 form.
The freelancer’s business net income is posted to Schedule 1 of Form 1040, and the amount is added to other income (spouse’s income, dividend income, interest income) on the personal tax return.
Here are some other forms that are not required for freelancers.
Other tax forms
If you’re worked as an employee, you may be familiar with these forms:
Understanding Form W-4
The Employee’s Withholding Allowance Certificate (Form W-4) is a form that the federal government requires employees to fill out when they are newly hired. Information submitted on the form (allowances) lets employers know how much salary to withhold from a paycheck for tax purposes.
Freelancers are not categorized as employees, and do not need to complete W-4 forms for clients.
Going over pay stubs
A pay stub lists all of the key information related to an employee’s pay. The pay stub provides information on wages, tax withholdings, and benefit withholdings. In most cases, freelancers don’t receive pay stubs from customers.
Whether you’re a freelancer or a business owner, you can save time and increase accuracy by using technology.
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