Freelancing is a vast and open field, which means that the term freelancing is not bound to a specific profession or active type. All types of professionals, such as engineers, marketing professionals, chefs, writers, logo designers, graphic designers, copywriters, voiceover actors, and many more, can be freelancers and work part-time at different companies.
More than fifty-seven million Americans freelanced in 2019, and now, more than 50% of Gen Z are deciding to work as freelancers. In 2020, after the rise in unemployment due to the pandemic, many people switched to the freelancing field.
In this age, even businesses are getting comfortable with the trend of hiring freelancers. It is an advantage for companies to hire freelancers as they don’t need to provide them with the health and other benefits they provide to their full-time employees. The most significant advantage for people to freelance is that there is no tax deduction on freelancers’ pay, and they get the total compensation themselves.
Other benefits include being independent over their working hours, choosing their clients, and controlling how much they want to work and how much workload they can bear. Freelancers also outsource their tasks from different regions, which means that even non-Americans can work for American companies, and their way of communication is usually the Internet.
The fifty-nine million Americans who freelance generate $1.2 trillion in annual earnings, making more than $20 thousand per year on average for each freelancer.
Due to no tax deductions, some freelancers believe that their freelance accounting is not complicated. They pay little to no attention to it, which is wrong as freelance accounting involves many different little things. Freelancers or self-employed people need to create a proper accounting system for their business and keep track of the income and expenditure they are receiving and paying. The basic accounting all freelancers and self-employed should know and follow are:
- Keep your personal and professional accounts separate. It is advisable to keep these two accounts separate strictly. You can track your income and expenses, which are not confidential, and calculate the self-employment tax to ensure that you have that money at the time of the scheduled tax payment. Make sure that you open a separate business account when you start freelancing.
- Stay organized. Save all the receipts and invoices to avoid being overcharged in taxes. You can also introduce a digital system in your business, allowing you to keep digital copies of receipts instead of stacking a pile of paper receipts.
- Pay attention to the necessary financial documents.
Form W-9 is a form that freelancers provide to the clients they are currently working with, including your Social Security number or Taxpayer Identification Number, to inform the IRS of their payments to you.
Schedule C is a form for self-employed people that includes the profits and losses your business makes for your tax paying. To fill out this form, freelancers need to calculate the cost of goods, gross profits, and expenses—Schedule SE in the form of self-employment tax.
Freelancers are only required to fill out Form 1040-ES to generate over a thousand dollars of tax. These types of taxpayers are supposed to pay taxes four times a year instead of once.
There are two types of 1099 Forms, 1099-MISC and 1099-K. Your clients use these forms to report the total amount you collect during the tax year. Clients send freelancers or self-employed the 1099-MISC form when they deliver $600 or more in a single year. They file this form with the IRS and then send it to you. The 1099-K form is for freelancers or self-employed who accept credit card payments. But freelancers only receive this form if they have taken more than twenty-thousand dollars and have made over two hundred transactions.
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