Tax professionals took some time from their busy tax season schedules to weigh in on some issues freelancers face when filing their self-employment taxes.
Other than virtual meetings, email, and phone calls, it seems the COVID-19 pandemic has reshaped almost every other way business is being conducted. As the economy continues to bounce back from a six-month-long shakeup unlike any decline ever witnessed, many individuals have been left on the unemployment line.
In the case of freelancers, the downturn has had a negative effect that’s rippled through the community, drying up the amount of work a writer or programmer had been accustomed to receiving. While unemployment benefits were enhanced and extended for W-2 employees, the self-employed population found some relief in an expansion of the special programs put in place to assist all workers impacted by the coronavirus outbreak.
For those with full-time gigs or side hustles the concept of accepting and reporting unemployment benefits may be a bit foreign since relief packages aimed at helping freelancers are unprecedented. Thus, it’s probably a good time to review how to apply for these benefits and then how to claim them for tax purposes after you’ve received the funds. In what follows, we’ll take you through both processes.
Claiming Unemployment Benefits as a Freelancer
Up until 2020, if your business stalled because of a recession or economic pullback, you were more or less left to fend for yourself when it came to government assistance. No one needs any reminder on how extensively the pandemic has pervaded both the business and social scenes.
Enter the Coronavirus Aid, Response, and Economic Security Act (CARES).
Among initiatives aimed at propping up businesses of all shapes and sizes, legislative sponsors of the CARES act recognized that self-employed folks would have an equally tough time staying afloat as massive layoffs and shelter-in-place restrictions took shape. Thus, the Federal government added a bit for freelancers to an approximate $2 trillion relief package passed in April 2020. For the first time in history, independent contractors, sole proprietors, etc. could expect some dollars to help pay the bills.
A State-by-state Approach
Unemployment compensation programs have been traditionally handled by the states, and while the basic principle is the same, you’ll want to check with your own state’s website before filing a claim for benefits.
Before you apply, you’ll need to qualify for benefits. It’s important to note that a weekly additional Federal benefit of $600 expired on July 31st, 2020, and Congress has come back to the table to negotiate an extension of those payments. The result may be that any future weekly amounts may be less than the $300 extension funded by the Federal Emergency Management Agency, filling in the gap between August 1st until September 5th. To receive the enhanced COVID-19-related benefit, applicants will need to have been affected the virus in one of these ways:
If supplemental Federal benefits are extended, unemployment, partial unemployment, or the inability to work must accompany at least one of the following common COVID-19-related circumstances:
- Diagnosis of COVID-19 or currently seeking diagnosis
- Diagnosis of COVID-19 within the household
- Caring for a family or household occupant who has received a positive diagnosis of COVID-19
- Being the primary caretaker for a child or other household occupant who can’t attend school or other facility that’s shut down due to the virus
- Leaving employment as a direct result of COVID-19-related circumstances
- Experiencing workplace closure as a direct result of COVID-19
Decreased revenue, even if an indirect result of the virus, may still allow you to claim unemployment compensation. Since the process differs by state, let’s just use Pennsylvania as a boilerplate example of how to file.
These two criteria must be met before filing:
- You have complete discretion and control over the performance of your duties for any entity with which you enter into contractual agreements.
- With respect to those services, you are recognized as an independent business entity.
Once you’ve established that you do meet the requirements, the easiest way to file a claim is through your individual state’s website or via phone where applicable. You’ll need certain information on hand, including a record of self-employed earnings to date, as well as relevant personal information.
Filing Taxes on Unemployment Benefits
Once you’ve received unemployment compensation, you’ll need to report the benefits at tax time. If you use software to file Form 1040 yourself, you’ll need to enter amounts received from both Federal and state governments. These payments will be recorded and reported on Form 1099-G, which will likely be mailed to recipients by January 31st, 2021.
If you do self-file taxes, the program you use will typically ask you if you’ve received benefits of this type, and you can simply enter the amount into the applicable box. Should you use a tax professional to file a final return, retain the form, and provide it to the specific preparer.
One big question on your mind might be how these payments will affect your tax situation. In the past, you may have received a return or had to cut a check to the Department of the Treasury for taxes you owed. The answer is: It depends. You’ll need to assess your individual circumstances to determine whether these benefits result in a payment or a refund. The best way to prepare for either scenario is to consult a tax professional or do some forecasting with the software you deploy. However, one fact is incontrovertibly true: Unemployment benefits are taxable to the recipient.
To help you along, be sure to save a paper or electronic record of all payments you’ve received and diligently track all expenses you feel may qualify as a business deduction. Should you have questions about whether a particular good or service meets the definition of a legitimate business expense, once again it’s important to consult with a tax professional.
Perform Your Due Diligence
The best way to track freelancing income, expenses and, tax filings is to have a system that effortlessly tracks and records all the data you need as time progresses.
It could make your job (particularly the administrative details) much easier when you have all the necessary information at your fingertips for when tax time rolls around. Consider enlisting the services of AND.CO to help you on the journey of growing your business— and leaving some of the driving to us.