Introduction to Taxes for Freelancers

Guest blog, courtesy of NAFLP member attorney Vincent Kan*

Introduction

Freelancing provides many great benefits - the pride and satisfaction of owning your own business, flexibility in how you accomplish your work, improved work-life balance, amongst others. However, with all the benefits comes all of the burdens of ownership including paying income and employment taxes. Understanding these obligations is important to ensure taxes are paid on time and without stiff penalties from the Internal Revenue Service. For the purposes of this article, I will assume that you are either a sole proprietor or the only member of an LLC which has not made a Form 8832 election to be treated as a corporation (and is also treated as a sole proprietor). Freelancers operating in the corporate form (with or without an S election) face additional reporting requirements and restrictions at the entity level.

Employer Identification Number

Most businesses are required to have an Employer Identification Number (EIN) from the Internal Revenue Service in order to process their ongoing tax obligations. Sole proprietors can use their social security number(SSN) in lieu of an EIN if they do not have employees or file excise, employment, alcohol, tobacco, or firearms returns. Despite this, freelancers may still want to get an EIN for their work as many businesses who pay you are required to get your either your SSN or EIN (through Form W-9) in order to meet their own information reporting requirements to the IRS (usually Form 1099-MISC). Having an EIN both future-proofs your business in the event you do need to hire employees of your own to help manage your work and minimizes the risk of identity theft through disclosure of your SSN to your vendors.

Income Tax

Like your former employer, you as a freelancer are subject to income tax on your freelance work’s gross income minus deductions and credits. As the vast majority of freelancers will be on the calendar-year cash method, this means that . . .

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