Freelancer

What Is a Freelancer?

A freelancer is an individual who earns money on a per-job or per-task basis, usually for short-term work. A freelancer is not an employee of a firm and may therefore be at liberty to complete different jobs concurrently by various individuals or firms, unless contractually committed to work exclusively until a particular project is completed.

Understanding Freelancers

Typically, freelancers are considered independent workers and may do their contract work full time or as a side job to supplement full-time employment, time permitting. Freelancers, as independent contractors, typically require signed contracts for the job to be done and will agree to a predetermined fee based on the time and effort required to complete the task. This fee may be a flat fee or a per-hour, per-day, or per-project fee, or some other similar measure.

A freelancer tends to work in the creative, skilled, or service sector, such as in film, art, design, editing, copywriting, proofreading, media, marketing, music, acting, journalism, video editing and production, illustration, tourism, consulting, website development, computer programming, event planning, photography, language translation, tutoring, catering, and many more.

Freelancers and Taxes

The Internal Revenue Service (IRS) categorizes freelancers as self-employed. A self-employed worker, unlike an employee of a company, does not have their taxes withheld by the company with which they are doing business. Paying income taxes is, therefore, the sole responsibility of the freelancer, and estimated taxes must be paid in advance in quarterly installments. In addition to the income tax, a freelancer is also subject to the self-employment tax mandated by the IRS. The self-employment tax applies to a freelancer who earned $400 or more in any given tax year. The tax has two components: one for Social Security and the other for Medicare.

As the IRS considers freelancers to be business owners, they have to pay self-employment tax as both an employer and employee. Social Security tax is assessed at a rate of 6.2% for an employer and 6.2% for the employee. An independent worker such as a freelancer would be taxed 6.2% + 6.2% = 12.4%, as they are considered to be both an employer and an employee. The Social Security tax is only applied to the first $137,700 of income earned in 2020 (this so-called taxable maximum will be raised to $142,800 in 2021). The Medicare tax rate, which is 1.45% for both entities, is 2.9% for the self-employed worker. The total self-employment tax rate that a freelancer has to pay is therefore 12.4% + 2.9% = 15.3%.

Freelancers may qualify for certain tax deductions that business owners can claim on their business expenses. According to the IRS, these have to be ordinary and necessary expenses (O&NE) for the operation of the business. This means that a freelancer would not be able to claim a deduction on an expense that they would normally make without the business. Some examples of deductions that can be claimed include home office deductions, such as rent and utilities, the costs of traveling to a job, the costs of entertaining a client, the cost of courses or certifications that directly relate to the business profession, and more.

In the U.S. freelancers do not receive W-2 forms for income tax purposes and instead are sent a 1099-MISC tax form, which typically doesn't include any tax withholdings. A freelancer who provided services to multiple clients during a given tax year will receive 1099-MISC forms from each of those clients.

Freelancers are required to pay estimated income taxes to the IRS, in advance and on a quarterly basis, as they have no taxes withheld from their paychecks.

Benefits and Drawbacks of Being a Freelancer

The benefits of being a freelancer include having the freedom to work from home, a flexible work schedule, and a better work-life balance. Freelance work can benefit workers who have been laid off, reducing the incidence of overall unemployment in an economy.

Drawbacks include uncertainty about future income, job stability, and consistency with getting new work. There is also a lack of employer benefits, such as insurance and retirement plans, and sometimes lower per-hour rates compared with employed salary earners. Aside from those who qualify for Pandemic Unemployment Assistance (PUA), freelancers are not eligible for unemployment insurance.

Examples of Freelancers

An example of a freelancer would be an independent journalist who reports on stories of their own choosing and then sells their work to the highest bidder. Another example is a web designer or an app developer who does one-time work for a client and then moves on to another client.