I'm a CPA: This Is What the IRS Actually Wants From Your Freelance Income
As a freelancer or side hustler extraordinaire, you know what your clients expect from you. Whether you’re driving them home from a party or getting the energy out of their very high-strung puppy, you’re clear about what you need to do. If only the Internal Revenue Service gave you that same level of clarity.
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With all its rules and codes, it’s hard to know what the IRS really wants from your freelance income. Fortunately, Gene Bott, a CPA, tax advisor and partner at Kevin O’Leary’s Tax Hive, does know. MoneyLion talked to Bott about what the IRS actually wants to see from your freelance income.
Treat Your Freelance Work Like a Business
The IRS wants you to treat your freelance work like a business — even if it still feels more like a side hustle than a full-fledged company.
“They want you to report that income on a Schedule C, so long as your income exceeds $400, and pay self-employment taxes on that related income,” he said. “This can often be difficult because those you work for don’t have to give you a 1099 under several circumstances.”
What are those circumstances? Clients generally don’t need to send you a 1099-NEC if they paid you less than $600 for the year. In addition, when you’re paid through third-party payment platforms like PayPal, Venmo or Cash App, the platform — not your client — may be responsible for reporting the income to the IRS. That means it’s still up to you to know exactly what you earned, even if no tax form shows up in your mailbox.
Keep Thorough and Accurate Records
Believe it or not, the IRS isn’t out to get you. As Bott explains it, proper bookkeeping not only helps you keep track of your income — especially when forms are missing or incomplete — it “also helps you claim deductions against the income so you can reduce your tax bill.”
With proper documentation, expenses such as software subscriptions, a home office, equipment, professional development and even a portion of your phone bill can potentially lower what you owe. But there’s a catch: You can only claim deductions you can substantiate. That means you should keep receipts, statements or other records that support the expense.
If you don’t track expenses in real time, you could be leaving money on the table during tax season. A simple spreadsheet could be your new best friend. But if you’re not exactly gifted at creating spreadsheets, don’t worry: There are plenty of accounting apps that can help you track income and expenses throughout the year.
Make Quarterly Estimated Tax Payments — or Risk Penalties
Traditional 9-to-5 workers often don’t have certain perks that freelancers do, like the freedom to start work whenever they want or turn a coffee shop into their de facto office. They do, however, have one major advantage: Their taxes are withheld from each paycheck. Freelancers don’t get that convenience.
If you expect to owe at least $1,000 in federal income taxes — after subtracting any withholdings and refundable tax credits — the IRS generally expects you to make quarterly estimated tax payments.
“The IRS expects quarterly installments (payments) of your expected tax bill,” Bott said. “The easiest way to figure out what this is would be to take your prior year’s tax bill, multiply it by 110%, and pay one-fourth of that every quarter. Failing to make these payments can result in hefty fines of up to around 25% of your overall tax bill, so you don’t want to miss them.”
No, you definitely don’t want to miss these payments. The due dates typically fall on April 15, June 15, Sept. 15 and Jan. 15 of the following year. If the 15th falls on a weekend or federal holiday, taxes are due the next business day.
The Bottom Line
As a freelancer, you might feel like you need a crystal ball to understand what the IRS really wants from you. You don’t. You just need to treat your freelance work like a real business, keep careful records of both income and expenses, and plan ahead for estimated tax payments. Do those things consistently, and you’ll be giving the IRS exactly what it’s looking for.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal, or tax advice.
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