How to Handle Freelancers at Tax Time

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You hired a freelancer for some temporary work at your business, but now you’re worried about what the Tax Man requires. After all, you were already so busy you had to get somebody else to come in to write that blog post/add on to your home office /upgrade your computer/etc. How in the world are you going to find the time to do extra taxes?

Luckily for you, they’re actually not that complicated. While they seem like they should be tougher, freelance taxes are simple for the small business owner to deal with. But first, there’s something we should clear up.

What is a Freelancer?

First of all, let’s clarify something. Did you actually hire a freelancer or did you accidentally hire an employee? While this may sound like an absolutely ridiculous question, rest assured the IRS takes the matter very, very seriously. It’s actually been a real problem lately, and they will come down on you hard if you’re not careful.

There are several criteria someone must fit if they are to be considered a freelancer rather than employee. If they don’t fit all of these neatly, you may have accidentally hired an employee, which you need to fix quickly!

First, a freelancer doesn’t work out of your office (unless they’re actively fixing something in your office, like plumbing). They also come prepared for the job and don’t require any on-site preparation other than specific details on how your business operates.

You also don’t pay them on a regular basis – it’s per job, every time, and every time there’s a new job there’s a new contract. If you didn’t get a contract because it’s “too messy,” get one now! The freelancer should also have something that shows they have their own business – a card, an address, a specific work email, something that shows a business presence.

If they don’t fit all these you may have an employee on your hands. Why does the IRS care about all this? Because the taxes will be totally different, both for you and the person in question. Again, it’s been a big deal lately so if you try to hide it they most likely will find out!

The 1099

So you truly have hired a freelancer and not an employee. What kind of paperwork do you have to deal with when dealing with freelancers and their taxes? There has to be a ton of paperwork, right?

Actually, there are only two pieces of paper you (in most cases) have to deal with when hiring a freelancer – the W-9 and the 1099-MISC. The W-9 is simply the right way for the freelancer to give you their name, address, company name (if applicable) and social security number or tax ID. You’ll need this form when filling out the other form you’ll need, the 1099-MISC. This is the tax form you fill out to show how much you paid to the freelancer for their work. And this is the biggest difference between having an employee and a freelancer tax-wise – the freelancer does all the tax-time work.

With an employee you have to take money out and report it to the government and pay a portion of their taxes and fill out all sorts of papers. With a freelancer, you pay them for their work and they go away. You send them the 1099-MISC and they have to figure out quarterly payments and their own taxes and all that jazz.

So if you’re been putting off hiring that writer or carpenter because of tax reasons, worry no longer!