It's getting close to the time most freelancers dread -- self employment taxes. If it's your first season filing as an independent contractor, you may have lots of questions:
Luckily, there are plenty of professionals who have walked the path before you, making it easier than ever to file as a freelancer. Your best bet against encountering a surprise is to use a freelance tax estimation tool to help you plan!
If you’ve ever filed taxes before, you’ve likely heard of the form 1040. This form is what is also called the "long form" by the IRS when filing your U.S. Individual Income Tax Return. It is not limited to freelancers. In fact, it’s the most popular tax filing form for most common filing situations, including filing as a single person, married, or married filing jointly.
There are a few additional versions of the 1040, including these:
Most freelancers will use the form 1040, as it is what the IRS requires if you are reporting income or loss from a business. Independent contractors must also file if they receive more than $400 in income from their work in a year. Assuming you have expenses to offset that income, you'll be using the Schedule C form, anyway, and this always accompanies the longer 1040.
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 use 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!
This version of the tax forms is much longer than the others. However, it allows filers to get the most of their return through various credits, deductions, and income types. You must fill this out and send it in to the IRS via one of their approved methods by April 15th each year, unless you apply for an extension.
Note: According to the IRS, 2018 has an April 17th, filing date due to April 15 being a Sunday “and the Emancipation Day holiday in the District of Columbia is observed on April 16—even if you do not live in the District of Columbia.”
(Filing for an extension only gives you more time to file; it does not mean you have more time to pay taxes owed – if you do owe them.) You must file for an extension well in advance of the 15th via form 4868 or through your choice of tax software.
While there is a number of ways to get your hands on Tax Form 1040, most choose to download it from the IRS website. Many local libraries and post offices still carry it, however, making it easy to pick one up even without access to a computer or printer. Your local IRS office will have some, as well, and it can be sent to you from the IRS via mail upon request. If you use any popular tax software, completion of the 1040 will happen automatically, provided you answer the questions for your tax situation correctly. Then, you’ll just have to file via the software.
Be sure you have the following pieces of info ready before you begin:
You may be asked to sign your form electronically before filing. You can do this by providing a piece of information from a past year's return (such as the Adjusted Gross Income) to verify your identity. Therefore, it's wise to have the past year's tax forms on hand, as well.
If you want any tax return to be refunded directly to your bank account, you can provide your checking or savings account routing and account numbers. Otherwise, your money may be sent via check. (Refunds deposited directly into an account are usually processed 2-4 weeks sooner, however.)
While the 1040 is straight-forward and a mere two pages, there are numerous opportunities to customize your filing to meet your unique financial situation. You may need to utilize many calculators and worksheets that will eventually accompany your 1040. Some of the most common worksheets that are needed to finalize your 1040 include:
To see the full instructions for the 1040 (as well as all the possible worksheets you can use to determine your filing status, taxes owed, or refunds due), you may visit the official IRS website. Remember, these calculators and worksheets come standard in most tax software services, where they will be filled out based on the answers you provide to their questions.
Many freelancers find out that they do, in fact, owe money to the IRS when they file. As long as you pay by the 15th, this is usually not a problem. If you owe a significant amount of money, however, there may be a penalty added to the amount. Filers may be required to pay estimated quarterly taxes – which is virtually your annual tax bill broken up into four installments over the course of the year. If the IRS decides that you should pay your tax bill quarterly, there will be instructions on how to make those payments for the following year, along with how to do that.
What if you can't pay? It happens. In fact, many freelancers are caught off guard by amounts that they may owe due to self-employment taxes that they weren't used to paying as a regular employee. By contacting the IRS about your situation, most tax payers have the option to make installment payments or a 1099 extension to make full payment. One other option is to put the balance of your tax bill on a credit card. (This choice carries a processing fee in addition to whatever interest or fees your credit card company may charge you, however, so it's generally used as a last resort.)
Running a freelance business can be made even more daunting by new tax rules that may apply to you as an independent contractor. If in doubt as to how to handle your 1040, additional worksheets, filing or payment, it’s wise to consult with a professional tax preparer, accountant, or Certified Financial Planner. They are well-versed in the best way to address the 1040 and its various nuances.
Remember, what has worked for you in past years may not work this year, as the tax law has just recently changed again, and your business will experience ebbs and flows in income and expenses.
Try managing your freelancing with a free Bonsai trial today.
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?