If you’re new to self-employment or still haven’t quite figured out the system, working out self-employment taxes can be a complex and confusing venture. Use this guide to demystify the process.
Ahh, taxes. Not the most fun subject.
Taxes can be complex but not as hard as you may think. And fortunately, there is a lot of help out there. Being self-employed has its pros and cons but it’s very important that you submit your earnings on time with all the necessary accompanying documentation. As a freelancer, you may receive a W9 form from your clients a.k.a. Request for Taxpayer Identification Number and Certification Regardless of whether you are part of the gig economy on a full or part-time basis, you will still need to submit your returns in 2022 and pay income tax accordingly.
What is a W-9?
A W9 is a form from the Internal Revenue Service (IRS) requesting a Taxpayer Identification Number and Certification. It is used for freelancers who work as contractors rather than full-time employees. It is important to note that you need to send the W-9 form back to the payer (i.e. your client) and not to the IRS.
A business or individual will send you a W-9 when they need your social security number in order to notify the IRS of how much they have paid you. This makes the use of the W-9 form important for transactions when the payment from the client to the contractor/freelancer was $600 or more.
As a freelance contractor, you have more control over when and how you complete projects. But you do not receive the same benefits as a full-time employee such as a 401k contribution match and health insurance which also makes your tax situation different. As an independent contractor, you can claim more deductions for your work expenses and home office. Your vehicle could even be a possible deduction depending on your line of work.
Be sure to consult a professional accountant to find out what you can and cannot claim for your business.
“Businesses that hire independent contractors do not withhold income tax or pay Medicare or Social Security taxes for their independent contractors, as they do for their employees. Instead, contractors are responsible for these obligations. However, the IRS still wants to know how much these contractors received to make sure they pay the taxes they owe, and it uses form 1099-MISC or form 1099-NEC to gather this information.” Investopedia
After you have filled out a W9 form and sent it back to the person/entity paying you, they may later send you a copy of a 1099 form (most frequently 1099-MISC or 1099-NEC). While the W-9 form is straightforward to fill out and the 1099 form shows you how much income you’ve received from different clients you’ve worked with, as a freelancer, your clients are not likely to be making tax payments for you so you will need to put money aside to pay your tax obligations quarterly yourself. Since the 1099 form will have your taxpayer ID and Social Security number, the IRS will know how much you’ve earned from different payers and will also know if you don’t report these earnings. Again, consult a professional if you need help with this. There are accountants who cater to freelancers and understand the ins and outs of self-employment.
To make this whole process easier you will want to stay organized with your invoices. And keep reports so you are prepared for tax time.
You can use Fiverr Workspace to keep your business organized throughout the year. You can store your client contacts, proposals, invoices, time tracking, and more. Then when tax season is upon you, Fiverr Workspace can generate the reports you may need to properly file your taxes.
Keeping track of all your clients in one place is helpful because you can review how much you have been paid by each client. This makes those W9s and 1099s so much less stressful. You will not have to go hunting through emails and documents to find everything you need. You can just focus on running your business.
How will the W-9 form affect my taxes?
Since the W-9 form is used in th US to request your identification information as a taxpayer if you are a freelancer (not working as an employee) it is very important to fill it in. If you fail to do so or do it incorrectly the return by whoever hired you to do work for them will be completed incorrectly and you will not be able to fully count the tax you owe to the IRS or state Department of Revenue. You can expect to pay around 28% general tax rate on a W-9 form but it’ll all deend on your income and the tax classification you belong to. If you’re not sure, it’s best to consult a professional accountant to help you with providing the right information according to your specific circumstances as a self-employed freelancer.
Do You Need To File?
According to the IRS Self-Employed Individuals Tax Center:
“You have to file an income tax return if your net earnings from self-employment were $400 or more. If your net earnings from self-employment were less than $400, you still have to file an income tax return if you meet any other filing requirement listed in the Form 1040 and 1040-SR instructions (PDF).”
The IRS has a virtual workshop about small business taxes that you can watch for free to get a better overview.
Always be careful when someone asks for your tax ID number or social security number.
“An independent contractor who receives an unexpected W-9 should hesitate before filling it out and research whether the requester has a legitimate reason to ask for this form.” Investopedia
Note: The IRS 2022 filing season (for the 2021 tax year returns) started on Jan 24th 2022 and the deadline for submitting your returns is April 18th 2022. Even if you haven’t received a W-9 or consequently a copy of a1099 form with information return from the people who paid you, you’ll still need to file a return.
Stay organized with Fiverr Workspace and get the help you need to breeze through tax season minus the stress while keeping your focus on your business and clients. Happy Freelancing.