Taxes are confusing for most people, and who can blame them? The different forms, the multiple calculations, the exemptions, the 1099 deadlines: it is easy for the taxpayer to be overwhelmed, disoriented, and intimidated by all those things, especially when the instructions to filing them are written in unfriendly legalese.
Freelance workers are no exception when it comes to being puzzled by figuring out their income and other taxes, especially since, unlike W-2 workers whose income/social security/Medicaid taxes are withheld from each paycheck, freelancers are expected to calculate and put aside what they owe in 1099 taxes to the Internal Revenue Service on their own.
If you are not sure if/how to report the income you earn as a self-employed entrepreneur to the IRS, read on to see:
There is also a "self-employment tax" to be paid, which is essentially a Social Security/Medicaid tax.
In the tax year 2021, the self-employment tax has been set at 15.3% (12.4% for Social Security and 2.9% for Medicaid taxes).
Keep in mind that, as an independent contractor/freelance worker, you can be exempted from paying self-employment tax if your net earnings are $399 or less per year.
Try our free 1099 self-employment tax calculator to check how much you could owe for the 2021 tax year.
U.S. tax system is "pay-as-you-go", which means that, as earnings come in, taxes must be paid on them on an ongoing basis.
For W-2 workers, their tax estimates are already withheld from all the paychecks issued by their employers.
Independent (form 1099) workers, on the other hand, do not typically have taxes automatically withheld from the money that is paid to them by clients -- and it is the freelancer's obligation to pay the legal (federal/state/social security/Medicaid) taxes on all that income.
It would be a nightmare to pay individual taxes on each freelance gig, so the IRS set up a schedule for self-employed workers, whereby they file payments of tax estimates on a quarterly basis, every three months.
The American taxpayer is required to report all income: from all sources and regardless of whether it's a solitary dollar or a million bucks.
Essentially, to the IRS, an independent contractor is classified as a "1099 income worker": someone who is not an employee of any one organization or enterprise, but a freelance, self-directed entrepreneur who provides specific professional services / complete various assignments for multiple clients.
Being a "form-1099 worker" means that some version of the 1099 IRS form will be involved in the filing of your tax return.
The tax form 1099 is a kind of an "information return" form, issued by the payer to the independent contractor. Any commercial entity that contracts your freelance services is required to issue a 1099-NEC form to you by no later than January 31st of the tax year.
There exist a wide variety of state- and IRS-associated 1099 forms that are used in reporting non-salary-type taxable income. Here are the top/most frequently used ones:
As a freelancer, you are likely to receive a 1099-NEC form (prior to year 2020, it would have been form 1099-MISC) from each business that contracted your services that resulted in a payment of $600 or more during the tax year.
Likewise, if you contracted the services of other independent workers to help run your business, which resulted in paying them $600+, you are expected to issue a 1099-NEC form to each of them by January 31st.
Alas, not being issued the form 1099 from a client does not legally absolve the taxpayer from having to report/pay taxes on that income with the IRS. (If you wish to simplify and optimize keeping track of / filing your taxes, bring the Bonsai Tax app onboard your business!)
As mentioned, there exists a $600 threshold for whether self-employed income is reported on a 1099 form or not.
To be clear, the $600 rule is a bureaucratic distinction -- it does not mean that lower-than-$600 income is not taxed!
If a freelancer made less than $600 from a contract/gig with a client, they must keep track of that income and pay quarterly estimates as well as end-of-year taxes on them, just like any income over $600 (If that sounds like a lot of work, consider letting Bonsai Tax app help you estimate quarterly payments and file your tax return!)
The standard tax return form most taxpayers file is form 1040. Self-employed tax filers additionally fill out form Schedule C.
Schedule C functions as a hub for all freelance income and expenses. Schedule C is used to report "income or loss" from a profession you practice as a sole proprietor. Technically, any activity can be qualified as a "business", provided that:
Keep in mind that the best evidence of income and business expenses is a complete set of original receipts of all the relevant transactions, so make sure to hold on to/archive those throughout the year. (Use our cloud-based Bonsai Tax receipt organizer/expense tracker to help you and save on time, effort, and stress!)
Unless you've resigned yourself to never doing legitimate business/earning legitimate income in the U.S., you should take care not to burn bridges with the Internal Revenue Service.
The Internal Revenue Service does not just "not like" incomplete or late payments, they impose penalties for these infractions and shake you down for the full amount of what is now considered a "debt" with interest!! They can issue large penalties for not filing 1099 forms.
If income is intentionally under-reported or kept secret by the taxpayer, the IRS can bring them up on tax fraud charges, the more severe of which may come with an actual jail sentence for "purposeful evasion".
However, even though you can't get out of paying income taxes, what you can do is reduce the net earnings to be taxed -- by collecting and deducting all your business expense receipts!
Doing taxes is a daunting experience best handled with professional help. That help can come in the form of hiring an accountant, which is the recommended route.
However, accountants can be pricey. Luckily, the next best thing -- the Bonsai freelancer accounting app -- is super helpful and affordable!
If you bring Bonsai Tax abroad your business, much of the sorting of materials, the calculating of numbers, and the filling of quarterly estimates, as well as tax returns at the end of the tax year, will be taken over by smart software designed for this very set of tasks.
The Bonsai Tax app will:
In other words: Bonsai Tax will help you keep track, maintain control over, be on-time with the payments to the IRS, and ensure that those payments are accurate and won't get you fined or audited. In other words, the app will make filing taxes as a freelancer a cinch.
And it even has an advantage over a human accountant -- it doesn't sleep! Bonsai Tax software/app is always at your fingertips (from computer or phone), letting you access your account on your own time, anytime. Test drive our software for 14 days by clicking here.
As you employ the smart assistance of the Bonsai Tax app, you will find that not only does it have tremendous practical utility, it also comes with the sense of satisfaction and relief in knowing that your finances are in order, updated, and stored in a safe and secure digital environment.
With Bonsai Tax on board, you can focus on doing your best work for your clients, knowing that your business book-keeping is in good hands.
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.
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:
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.
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.
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:
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.
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?
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.
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.
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.
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.
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?