Freelance Taxes Made Easy: 1099 vs. W2 vs. W-8BEN

Published Oct 20, 2017Last updated Nov 09, 2017
Freelance Taxes Made Easy: 1099 vs. W2 vs. W-8BEN

As Benjamin Franklin once said, “Nothing in this world can be certain, except death and taxes.” Taxes are an inevitable part of doing business, whether you’re the customer, employer, or business owner — at the end of the day, the tax man gets his due.

If you’re in a traditional employer-employee relationship, how to file taxes is pretty clear cut — if you’re a client or freelance developer, it might not be as easy as simply filing a W-2 and calling it a day.

In this post, we’re going to walk through how both U.S.-based employers and freelance developers file taxes on engagements that involve freelance services.

We’ll walk employers through: the different tax forms, what form to file, deadlines, income thresholds, and what’s needed from the freelancer to file taxes on their behalf.

For freelance developers, we’ll look at: when taxes are filed, what the minimum income is to necessitate filing, what forms need to be filled out, what the self-employment tax is, and what the state income tax rate is across the board.

Read on to have your freelance tax filing questions answered!

Clients: How to File Taxes When Hiring a Freelancer

Do I have to file anything on behalf of my freelance developer?

If you’ve employed a freelance developer and paid them over $600, you need to file a 1099-MISC on their behalf. If your freelance developer does not have a green card, is not a U.S. citizen, or is not a resident alien, you need to have them fill out a W-8BEN to limit your tax liabilities. If you work with a freelance developer platform, like CodementorX, they take care of 1099-MISCs and W-8BENs for you, so you don’t have to file anything.

freelance taxes for clients

What is a 1099-MISC?

A 1099-MISC is used to report miscellaneous, or non-employee income, to the IRS. It’s typically used to report income earned by an independent contractor that is not an employee. A 1099-MISC is different from a W-2 because it does not include federal/state withholdings or Social Security and Medicare taxes (because the independent contractor is responsible for paying those themselves).
A 1099-MISC form has 5 parts:

  • Copy A is submitted by you to the IRS
  • Copy 1 is submitted by you to the state tax department
  • Copy B is for your freelance developer
  • Copy 2 is given to your freelance developer to file with their state tax department
  • Copy C is kept by you for your records

What is a W-8BEN?

A W-8BEN certifies foreign status in terms of tax withholding on income. This allows the freelance developer to claim tax treaty benefits, which may allow the freelance developer to be exempt from the 30% tax rate on income withholding your business would be required to withhold on his or her behalf.

When is the filing deadline?

The filing deadline is January 31st of the following year. Beginning in 2017, the tax deadlines for both the W-2 and the 1099-MISC is January 31st. You must file the 1099-MISC to the IRS and provide a copy for your independent contractor/freelance developer by January 31st. If January 31st happens to fall on a weekend or holiday, the filing deadline is due the next normal business day thereafter.

What is the cutoff amount for tax filing?

If you’ve paid your freelance developer/independent contractor more than $600 for work done in a given year, you need to file a 1099-MISC to the IRS and provide a copy for your freelance developer by January 31st so that they can file their taxes.

What do I need from the freelance developer to file the 1099-MISC?

If your freelance developer is subject to U.S. taxes, you need them to fill out a W-9 so that you can file the 1099-MISC. If your freelance developer is not subject to U.S. taxes, they need to fill out a W-8BEN.

What happens if I don’t file a 1099-MISC?

As an employer, if you don’t issue a 1099-MISC to your freelance developer or independent contractor by January 31st, or file one incorrectly, the penalty varies from $50 to $260 per form, depending on how late you file.

Developers: How to File your Freelancer Taxes

freelance taxes flowchart

Do I have to file taxes?

If you’ve made over $400 as a freelance developer, you need to fill out a W-9 for your client and report the income on your federal and state income taxes. Your client will provide you with a 1099-MISC to file with your state tax bureau, and you will file a 1040 with the IRS. You will also pay a 15.3% self-employment tax.

In addition, if you expect to make more than $1,000 in self-employment/independent contractor taxes after withholdings, you will need to make quarterly payments on your estimated taxes, which we’ll explain in greater detail below.

When is the filing deadline?

The federal and state tax deadlines are April 15th. If you expect to owe more than $1,000 in self-employment taxes after all other withholdings, you may have to pay quarterly taxes toward your self-employment tax every three months.

The deadlines for quarterly self-employment taxes are January 15th, April 15th, June 15th, and September 15th. If you fail to pay your self-employment taxes on or before those dates, you may receive a penalty.

What is the cutoff amount for tax filing?

The cutoff for filing income tax on your freelance activities is $400.

What do I need to do to file taxes?

If you’re a U.S. based freelance developer subject to U.S. taxes, you need to fill out a W-9 to give your client so that they can file a 1099-MISC on your behalf and furnish you with a copy that you then use to file your 1040. As a freelance developer, you need to file federal and state taxes.

If you’re a non-U.S. based freelance developer, you need to fill out a W-8BEN so that your client may be excused from withholding 30% of your payment.

How do I report Form 1099-MISC?

You can include income from the 1099-MISC on your 1040. This is generally done by filling out Schedule C, Profit or Loss From Business, then transferring the net earnings to Line 12.

What happens if I don’t report a 1099-MISC?

If you receive a Form 1099-MISC but don’t report it on your tax returns, you could potentially receive a penalty that is 20% of your underpayment (a penalty for not paying your taxes) in addition to the taxes you owe.

For example, let's say your regular tax liability is 15% and you made $1,000 as a freelance developer, received a 1099-MISC, and failed to report it on your 1040. If the IRS found out, you would be on the hook for the 15% in taxes you owe ($150) plus a penalty of 20% ($150 x 20% =$30), for a total of $180, for not reporting your 1099-MISC.

What is a Self-Employment Tax?

As a freelance developer, you are subject to a 15.3% self-employment tax on top of your normal tax bracket obligations. The self-employment tax is comprised of Social Security and Medicare taxes that, as a regular employee, would be deducted from your paycheck. However, because you’re self-employed, you pay both the employer and employee parts of your Social Security and Medicare taxes.

Social Security accounts for 12.4% of your self-employment tax, and applies to the first $118,500 of your earnings. Anything you earn past that is not taxed.

Medicare makes up the remaining 2.9% of the tax. There is no ceiling for this 2.9% tax, whether you make $20,000 or $200,000 from freelancing, you will pay 2.9% of your income towards Medicare taxes.

That being said, you can claim 50% of what you pay in self-employment tax as income tax deduction. Other deductions can include software costs, hardware costs, a percentage of internet bills, unpaid invoices, and home office space (if your home office is used exclusively for your freelance engagements).

As mentioned earlier, if you expect to pay more than $1,000 in self-employment taxes after all other withholdings, you may need to pay quarterly payments on your taxes.

To estimate how much to pay, take your total revenue, deduct expenses and deductions, and come up with your taxable income. Calculate your tax liability, divide that number by 4, and submit your quarterly payments (January 15th, April 15th, June 15th, and September 15th) online, through the Electronic Federal Tax Payment System.

If you have taxes that were not covered by your quarterly payments, you’ll pay the balance when you file your annual tax return in April. If you overpaid, you'll receive a refund. If you underpaid and did not make quarterly payments, you may face a penalty from the IRS.

State by State Tax Rate

Below is a map of income tax rates by state (as of 2017). As a freelance developer, keep in mind that you owe federal, state, and self-employment taxes (if your income was over $400). Thus, what taxes you owe will depend on your federal tax bracket as well as what state you live in. If you’re from Washington, Nevada, Alaska, South Dakota, Florida, or Texas, you don’t owe any additional state taxes. Otherwise, look at the map to estimate your state taxes for the next year!

income tax rates usa

Conclusion

While tax forms may seem overwhelming at first, with preparation and some research, filing taxes correctly and on time (to avoid penalties) is not as intimidating as it seems. The IRS has information and resources available on its website, and if you don’t have a CPA, they can also walk you through the steps if you require additional help.

Finally, if you need to hire a freelance developer, would like a service that helps you find a freelance developer, and taxes care of the freelancer tax filing process, create an account to get started with CodementorX!

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