If you’re a small business owner, a Fortune 500 company, or somewhere in between, chances are you’ve had to deal with freelance employees (aka 1099 employees aka contract employees). These are people who, rather than working for your company, work for themselves. Instead of coming in from 9-5 every day, they work on a single project or for a few hours a day. And they are also affected greatly by federal business income tax law.
And, of course, when someone you are using is affected, your business is affected too. Here’s the lowdown on how federal business income tax affects your freelancers and your company:
- As an employee. If you’re a freelance employee, the first thing you should do is save as much of your income as possible. Lock it away in an account that you never, ever touch. Because when you work as a freelancer you don’t get taxes taken out, which means your taxes are your responsibility. This is often means you’re filing as a self-employed business and so federal business income tax dictates you need to file quarterly, as opposed to annually.You should also hang onto receipts like your life depended on it. Anything business related can be deducted at the end of the year–this includes travel, internet, software, and so one. But you have to be able to prove that you did pay for it. Keep meticulous records and give your clients invoices often.
- As an employer. First, you must be very careful that you actually have freelancers. Federal business income tax applies to all employees, and so the IRS wants to make sure they get tax on as many employees as possible. As a result, there are a lot of guidelines for what determines whether or not someone is a freelancer or an employee. It doesn’t matter what a contract you two have signed says–if certain requirements (such as evaluations, being required to be in and office, and no share of revenue) as met, than you have an employee and are subject to tax.This is a very important part of federal business income tax law that is often flouted. As a result, the IRS has pledged a crackdown on this practice (which has especially picked up during the recession). So be sure to know what the federal business income tax guidelines say about freelancers and follow them closely or you could find yourself owning thousands in back taxes.
Freelancer, and hiring freelancers, is a great way for people to have freedom at their jobs and for companies to have expert advice as they need it. When used properly the system works best for both parties. But before accepting a freelance contract or hiring a freelancer, make sure you know what the federal business income tax rules and regulations are, or you could find yourself working for free–or owning thousands!