How to File Taxes As an Independent Contractor or Freelancer

Blog Post02/25/2016
Life Events

Upstarts such as Uber, Airbnb, and Upwork provide great opportunities for people to have an on-demand job, while working on their own schedule. If you’ve taken on one of these freelance or on-demand jobs, remember, the IRS still requires that you report your income for tax purposes. Use these tips to ensure you file properly and don’t get any surprises come tax time.

The Minimum Income Myth

You may have heard that small amounts of income aren’t taxable, but in fact, no job is too small for the IRS. All income must be reported, including money you might earn as an on-demand worker such as cleaning apartments for the startup Handy, delivering food for PostMates or running errands for TaskRabbit.

When companies hire you as an independent contractor rather than as a temporary employee, they’ll usually give you a tax form, Form 1099-MISC, stating your income over the past year. However, you must keep track of the money you earn, whether employers give you this form or not.

Keep your receipts when you do side jobs. If you’re self-employed — rather than a part-time employee — you can deduct legitimate business expenses from your income.  In order to be eligible, the IRS states that expenses must be “both ordinary and necessary.” So if you become an Uber driver, the cost of gas for taking people across town should qualify as a tax deduction, in addition to a portion of your mileage, car washes and other expenses directly related to your income. For most small side jobs, you can use Form 1040, Schedule C-EZ to report income and expenses. If your side job becomes more involved and your expenses are greater than $5,000 per tax year, use Schedule C

Tax Brackets and Side Jobs

Taking on a side job may have one unpleasant consequence if you already earn a full-time income: it could change your tax bracket, causing you to owe more income tax than you initially thought.
For example, if you earned a net income of $37,450 from your full-time job in 2015, your income is right on the edge of the 15-percent tax bracket. Each dollar you earn doing freelance work on a side job will be in the next bracket and will be taxed at the 25-percent rate. So if you earn $1,000, you will owe $250 for your freelance taxes. Note: that the brackets are adjusted for inflation every year.

Withholding Tax and Penalties

If you have a full-time job, you can ask your employer for a new W-4 form when you take on a side job. This is the form employers use to calculate how much tax should be withheld from your paycheck for the IRS. It has a section for listing additional income.

It’s important to fill out this form correctly by listing other incomes you receive, especially if your side job pays well. At the end of the year, you have to send the IRS an amount that is greater than 10 percent of your total tax obligation. If you don’t have a full-time job, you have to pay estimated taxes quarterly to avoid an underpayment penalty from the IRS.

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