"@bonsaiinc is probably my all time favorite freelance tool. hands down. the team is super responsive and accessible when i have questions."
David Urbinati
Motion design / animation
1099 freelancer tax form explained: 7 must-know facts
8
Min Read
Being a freelancer is fun and exciting, until it comes time to calculate your self employment taxes and pay them.
Filing and paying taxes is one of those administrative tasks that you can’t ignore, such as drafting agreement templates, sending quote templates, or tracking 109 expenses, and it is different for freelancers than other businesses; it’s also different than when you were working for someone else.
Navigating special forms like the 1099 tax form for freelancers can be confusing.
So let’s look at the 7 key questions and answers you need to know about the 1099 form for freelancers, to help you understand how to pay taxes as a freelancer.
1. Does a freelancer using the 1099 form have to pay taxes?
The short answer is yes.
Even if you’re a part-time freelancer, the Internal Revenue Service (IRS) does require you to pay taxes if you earn $400 or more from your freelance work in a year. If, for example, you do 1099 consulting and only earn $350, you won't have to file self-employment taxes.
There’s more.
As a freelancer, the IRS considers you to be self-employed, so your taxes will be filed as a business owner. That means you can organize your tax receipts and make deductions such as expenses, but it also means you have to and pay self-employment taxes.
As an initial plan, you should set aside 30% of your earnings for 1099 taxes. Using an integrated freelance program like that offered by Bonsai will help you track information such as payments and income. Beyond that, you can use Bonsai tax to estimate your taxes and identify your 1099 tax deductions.
2. What information do you need to prepare for tax time besides using the 1099 tax form?
There are a number of components that form the essential documents necessary in preparation for tax time:
- Form 1099-MISC is the most important document for freelancers. Each of your clients that pay you $600 or more in a calendar year must send you a 1099-MISC that states your income. These have to be received by Jan. 31. We’ll be digging into that form in detail.
- Your financial statements need to be kept for tax time, which includes your income (the 1099 tax form for freelancers records and any other records) as well as all expenses. You need to keep receipts for all your expenses. We recommend you digitally scan and track your receipts. You should hold onto receipts for at least 3 years after you file. And what are applicable expenses? Those that are considered “ordinary and necessary” for your industry, such a design software for a graphic designer.
- Home office expenses, if your office is located in your home. You may be able to deduct a portion of your home expenses.
- Mileage records, if travel is part of your work. Bonsai’s freelance tax software is ideal for recording such information.
- Form 1040-ES, which is how you calculate estimated taxes and pay them quarterly. It’s important that freelancers keep up with quarterly payments to avoid receiving an estimated tax penalty rate by the IRS. As an employee, those taxes would be withheld by your employer; as a freelancer, you have to pay the taxes yourself.
If you need help, check out step-by-step 1099 instructions guide to file your taxes.
But with the 1099 form for freelancers being the one of the most important records for your business, let’s dig into 1099-MISC.
3. What’s the purpose of the 1099-MISC form?
First off, it’s important to note that there are several 1099 forms, with MISC being the one meant for freelancers. The MISC basically means reporting miscellaneous income, or what a client has paid you for doing work. For example, if you use the on-demand staffing platform and work as a Wonolo 1099 freelancer, you'll receive a tax form.
The 1099 tax form for freelancers is also how you can easily calculate your annual income. All the 1099 freelance work forms should be filed for future reference, just in case the IRS raises any questions. Your batch of 1099 MISC doesn’t actually have to be filed with your return.
The information on the form shows your personal information including your address, and the Tax Information Number (TIN) for yourself and your client. The form also details how much money you made from the client.
You will receive the forms by Jan. 31 for the previous tax year; for instance, for the 2019 tax year, you’ll receive any 1099 form 2019 by Jan. 31, 2020. That will allow you to file your 2019 tax return before the deadline of April 15, 2020. If you need more time, you can file an extension for 1099 forms.
If the deadline date happens to be on a legal holiday or a weekend, the deadline becomes the next business day.
4. What about a W-2 vs 1099 form?
If you work for an employer and do freelance work on the side, you may be wondering about the forms 1099 vs. W-2.
A W-2 or Wage and Tax Statement, is what your employer will send to the IRS and to each employee at the end of the year. The W-2 is a record of your annual wages as well as the taxes that have been withheld or deducted from your pay.
As a W-2 employee, your employer deducts taxes for you, and submits them to the government.
A 1099-MISC could be considered the freelancer’s version of W-2, except the information is different. A 1099 tax form or W-2 both report income, but the 1099 form does not have taxes withheld. So when it comes to 1099 vs. W-2, the difference is really in what is not reported on the 1099.
5. What if you don’t get a 1099 tax form?
You should track all income so you know what clients owe you a 1099 form, and so that you can report income on your tax return when it’s time to file. You can make your life easier by keeping records in a program specially made for freelancers.
The 1099 misc income is sent by employers to the IRS as well, so any discrepancy between your records and the records of your clients could raise red flags with the IRS.
If you haven’t received the 1099 misc income information from a client by January 31, you should contact them immediately.
Alternatively, rather than ask for a form, simply report the income on your tax return. The IRS will likely have a record of the income from the client, and it will be matched to your Social Security Number, so you don’t want to miss reporting it. If you lose your information return, you can still report income without a 1099. It gets a little bit trickier with cash payments. You should still report cash income without an information return.
After all, reporting extra income for which you didn’t receive a 1099 is not an issue. The concern is when you don’t report income and IRS has a 1099 form showing you received the income.
As well, you may receive an income of less than $600 from some of your clients. In those instances, you won’t receive a 1099 tax form. But you still need to record and report income received from those clients, as it’s still considered taxable income.
6. What do you do with the 1099 tax form?
The 1099 form provides the necessary information you will need to file your tax return. Using the numbered boxes of the 1099 form like Box 6, you report your income from all sources on your tax return.
So at tax time, you have to input the information from each 1099-MISC. Tax software will lead you through the process of entering the information from each form. Or, a professional can help you with how to file independent contractor taxes.
Did you know that you can use Bonsai for accounting? Or that Bonsai can help you be prepared for self-employment tax by providing tax estimates, filling date reminders, and identifying your tax write-offs?
Let's see how that works. First, head to your main Bonsai dashboard and have a close look on the left side - we'll be working with the accounting and taxes sections. First click on "Accounting".
Inside the accounting section, you'll see a breakdown of your income and expenses. Both can either be automatically imported from your bank account, or manually added. Work you got paid for via Bonsai will also be registered here.
Make sure this section is properly filled in and click on "Taxes" next.
This is where the magic happens: Bonsai will do all the calculations for you, and we'll provide you with an overview of your tax estimates, a list of tax deductions you can claim on your Schedule C for the upcoming tax season, and reminders for all the upcoming filling dates.
Simple, right? If you're ready to check out Bonsai and explore all the features, go ahead and sign up for the free trial!
7. Do you ever have to issue a 1099 form?
When reading 1099-MISC instructions, you may wonder whether you have to issue one, and in fact there may be times when that’s the case.
For instance, you may outsource work to other freelancers, like a website designer to prepare your website, or a writer to complete web content.
If you ever pay a contractor more than $600, you will need to issue them a 1099-MISC as per instructions. It’s important when contracting with others to get them to fill out the proper form, in this case a W-9, which has the information you’ll need for issuing a 1099 tax form.
You’ll then have to meet the deadline of Jan. 31, to submit the forms to the IRS and the contractor. Read here for more answers to 1099 questions.
Final thoughts
Everyone will agree that taxes are painful! As a freelancer, knowing tax information and tracking your tax forms are an important part of running your business.
Our guide to answering all the questions you have about form 1099 will help you understand your obligations as a freelancer, including tracking income and expenses and filing the correct information with the IRS.
To ease the stress of understanding how to pay freelance taxes, consider the option of the integrated tools available to you as part of Bonsai’s freelance suite by signing up for a free trial now.
What Defines a Verbal Contract?
A verbal contract (formally called an oral contract) refers to an agreement between two parties that's made —you guessed it— verbally.
Formal contracts, like those between an employee and an employer, are typically written down. However, some professional transactions take place based on verbally agreed terms.
Freelancers are a good example of this. Often, freelancers will take on projects having agreed on the terms and payment via the phone, or an email. Unfortunately, sometimes clients don't pull through on their agreements, and hardworking freelancers can find themselves out of pocket and wondering whether a legal battle is worth all the hassle.
The main differences between written and oral contracts are that the former is signed and documented, whereas the latter is solely attributed to verbal communication.
Verbal contracts are a bit of a gray area for most people unfamiliar with contract law —which is most of us, right?— due to the fact that there's no physical evidence to support the claims made by the implemented parties.
When is a Verbal Agreement Legally Binding?
For any contract (written or verbal) to be binding, there are four major elements which need to be in place. The crucial elements of a contract are as follows:
- Offer and acceptance: An offer is made and accepted by another party involved in the agreement;
- Consideration: The involved parties must exchange something of value (money, a service, time, etc), this is known as consideration;
- Intention and certainty: All parties must fully understand the terms of the contract and intend to make a legally binding agreement freely; and
- Capacity: The parties must have the capacity to legally enter into the contract; they're above age and of a stable mindset.
Therefore, an oral agreement has legal validity if all of these elements are present. However, verbal contracts can be difficult to enforce in a court of law. In the next section, we take a look at how oral agreements hold up in court.
How strong is a verbal agreement in court?
Most business professionals are wary of entering into contracts orally because they can difficult to enforce in the face of the law.
If an oral contract is brought in front of a court of law, there is increased risk of one party (or both!) lying about the initial terms of the agreement. This is problematic for the court, as there's no unbiased way to conclude the case; often, this will result in the case being disregarded. Moreover, it can be difficult to outline contract defects if it's not in writing.
That being said, there are plenty of situations where enforceable contracts do not need to be written or spoken, they're simply implied. For instance, when you buy milk from a store, you give something in exchange for something else and enter into an implied contract, in this case - money is exchanged for goods.
Are you a freelancer?
Join 150,000+ freelancers using Bonsai's free contracts & invoices.
get started nowWhen are verbal agreements not enforceable?
There are some types of contracts which must be in writing.
The Statute of Frauds is a legal statute which states that certain kinds of contracts must be executed in writing and signed by the parties involved. The Statute of Frauds has been adopted in almost all U.S states, and requires a written contract for the following purposes:
- The sale of real estate or vehicles
- Real estate leases lasting longer than one year.
- Property transfer following the death of the owner.
- The case of a party agreeing to pay debt for someone else.
- Any contract that requires more than a year to fulfil.
- A contract involving and exceeding a specified amount of money (which varies by state).
Typically, a court of law won't enforce an oral agreement in any of these circumstances under the statute. Instead, a written document is required to make the contract enforceable.
Contract law is generally doesn't favor contracts agreed upon verbally. A verbal agreement is difficult to prove, and can be used by those intent on committing fraud. For that reason, it's always best to put any agreements in writing and ensure all parties have fully understood and consented to signing.
How are Verbal Contracts Enforced?
Verbal agreements can be proven with actions in the absence of physical documentation. Any oral promise to provide the sale of goods or perform a service that you agreed to counts as a valid contract. So, when facing a court of law, what evidence can you provide to enforce a verbal agreement?
How can you prove an oral contract?
Unfortunately, without solid proof, it may be difficult to convince a court of the legality of an oral contract. Without witnesses to testify to the oral agreement taking place or other forms of evidence, oral contracts won't stand up in court. Instead, it becomes a matter of "he-said-she-said" - which legal professionals definitely don't have time for!
If you were to enter into a verbal contract, it's recommended to follow up with an email or a letter confirming the offer, the terms of the agreement , and payment conditions. The more you can document the elements of a contract, the better your chances of legally enforcing a oral contract.
Another option is to make a recording of the conversation where the agreement is verbalized. This can be used to support your claims in the absence of a written agreement. However, it's always best to gain the permission of the other involved parties before hitting record.
Written vs Verbal Contracts: What's the Verdict?
Fundamentally, most verbal agreements are legally valid as long as they meet all the requirements for a contract. However, if you were to go to court over one party not fulfilling the terms of the contract, proving that the interaction took place can be extremely taxing.
So, ultimately, the question is: written or verbal agreements?
Any good lawyer, contract law firm, or legal professional would advise you to make sure you formalize any professional agreement with a written agreement. Written contracts provide a secure testament to the conditions that were agreed and signed by the two parties involved. If it comes to it, a physical contract is much easier to eviden in legal circumstances.
Freelancers, in particular, should be aware of the extra security that digital contracts may provide. Many people choose to stick to executing contracts verbally because they're not sure how to write a contract, or they think writing out the contract terms is too complicated or requires expensive legal advice. However, this is no longer the case.
Say hello to digital contracts
Today, we have a world of resources available at our fingertips. The internet is a treasure trove of invaluable information, platforms, and software that simplifies our lives. Creating, signing, and sending contracts has never been easier. What's more, you don't have to rely on a hiring a lawyer to explain all that legal jargon anymore.
There are plenty of tools available online for freelancers to use for guidance when drafting digital contracts. Tools like Bonsai provide a range of customizable, vetted contract templates for all kinds of freelance professionals. No matter what industry you're operating in, Bonsai has a professional template to offer.
Benefits of written contracts
A written contract makes the agreement much easier to prove the terms of the agreement in case something were to go awry. The two parties involved can rest assured that they're legal rights are protected, and the terms of the contract are sufficiently documented. Plus, it provides both parties with peace of mind to focus on the tasks at hand.
Create Professional Contracts with Bonsai
Bonsai's product suite for freelancers allows users to make contracts from scratch, or using professional templates, and sign them using an online signature maker.
With Bonsai, you can streamline and automate all of the boring back-office tasks that come with being a freelancer. From creating proposals that clients can't say no to, to sealing the deal with a professional contract - Bonsai will revolutionize the way you do business as a freelancer.
Why not secure your business today and sign up for a free trial?
Join 500,000+ freelancers using Bonsai's free contracts & invoices.
Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form.
