If you’re a freelancer in the U.S., then you’ve probably either just completed your income tax return early, or you (like many of us) are still in the process of completing it before the April deadline.
This post is for those of you who are still working on your tax return.
The income tax return of a freelancer is notably different from the income tax return of a corporate employee. Whether you’ve been freelancing for a long time, or just started freelancing, you should take note of the differences.
In this post, I’ll list and describe ten tax terms that all U.S. freelancers should understand. (This list is mostly specific to freelancers who use Form 1040.)
Tax Terminology for Freelancers
If you’re struggling with your income tax return for the first time, or just need a quick refresher, you’ll need to know the terms on this basic list.
Here’s the list of freelancing tax terms:
- 1099-Misc.–As a freelancer, you will not receive a W-2 form from your clients. U.S. clients who pay you over $600 should send you a 1099-Misc. (You may also be required to send out a 1099-Misc. if you paid an individual more than $600 for their services.) Regardless of whether you receive a 1099-Misc for the year, you are responsible for reporting all income that you receive.
- Asset–An asset is something with a monetary value that you use for your business. If you own a business asset that you will use for several years, check with your accountant to see if you can deduct depreciation expense.
- EIN–The term EIN stands for employer identification number. Many freelancers will not need an EIN. However, if you incorporated your freelance business, operate as a partnership, or if you had employees (not contractors) during the year, you may need an EIN.
- Expenses–These are the costs that are directly related to the running of your business. Examples of business expenses for a freelancer could include advertising, home office expense, supplies, business-related travel, and more. If this is your first year in business, you may also be able to deduct some of your start-up costs.
- Gross Receipts–Gross receipts refers to the total amount of money that your freelancing business received before your expenses are subtracted. If you have a product that you sell, such as a WordPress theme, gross receipts include the amounts received from the sale of your product as well as any amounts received for services you provide.
- Net Loss–If your business-related expenses are greater than your receipts for the year, then you may have a loss for the year.
- Net Profit–If your receipts are greater than your business related expenses, then you may have a profit for the year.
- Schedule C–Profit or loss from an independent contractor, sole proprietor, or a self-employed individual (this includes freelancing businesses) is reported on Schedule C of the Form 1040.
- Self-Employment Tax–Self-employment tax consists of the Social Security and Medicare taxes that employers normally pay for their employees. As a self-employed freelancer, you are responsible for paying these taxes yourself. Use Schedule SE of the Form 1040 to figure out your self-employment tax liability.
Note: This post does not constitute legal or tax advice nor should the Freelance Folder posts referenced here be considered legal or tax advice. For help with your own specific legal or tax issues, please contact a legal or tax professional.
Of course, this is just some of the tax terminology that you may face (and not be familiar with) as a freelancer in the U.S. Your specific situation may require that you understand additional terms as well.
Don’t Forget About the Health Insurance Deduction
A new deduction for freelancers this year is the deduction for health insurance costs for eligible individuals when computing self-employment taxes. This became law under the Small Business Jobs Act of 2010. You can learn more about this deduction from the IRS site.
We’ve written some other posts on Freelance Folder about income taxes that you may find useful. Here are some posts that contain even more information:
- When to Hire an Accountant
- 10 Tax Tips You Can Use Now To Avoid Pitfalls Later
- 10 Things You Should Keep for Tax Purposes
- Seven Benefits of Hiring Your Children
- 5 Tips For Filing Your Taxes Easily
What About You?
Do you do your own taxes, or will you hire a tax professional to do them? What is the biggest difference about income taxes that surprised you as a freelancer? Did I leave any terms out?
Share your answers in the comments.