BREAKING DOWN ‘Freelancer’
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, web site development, computer programming, event planning, photography, language translation, tutoring, catering, and many more. An example of a freelancer would be an independent journalist who reports on stories “at large” and then sells his or her story to the highest bidder. Another example is a web designer or app developer who does one-time work for a client and then moves on to another client.
The Internal Revenue Service (IRS) categorizes freelancers as self-employed. A self-employed worker, unlike an employee of a company, does not have his taxes withheld by the company s/he is doing business with. Paying income taxes is therefore, the sole responsibility of a freelancer. In addition to the income tax, a freelancer is also subjected 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 self-employment tax has two components, namely Social Security and Medicare tax.
Since the IRS considers freelancers to be business owners, freelancers have to pay self-employment tax as both an employer and employee. For example, 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 s/he is considered to be both an employer and an employee. The Social Security tax is only applied to the first $127,200 income earned. The Medicare tax rate, which is 1.45% for both entities, is 2.9% for the self-employed worker. Total self-employment rate that a freelancer has to pay is therefore, 12.4% + 2.9% = 15.3% (as of 2017).
Freelancers may qualify for certain tax deductions that business owners can claim on their business expenses. According to the IRS, these expenses have to be ordinary and necessary for the operation of the business. This means that a freelancer would not be able to claim a deduction on an expense that s/he would normally make without the business. Some examples of deductions that can be claimed include home office deductions such as rent and utilities, costs of traveling to a job, costs of entertaining a client, costs of courses or certifications that directly relate to the business profession, etc.
In the U.S. freelancers do not receive W-2 forms for income tax purposes and instead will file a 1099 Misc. tax form which does not typically 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.
Benefits of freelancing include freedom to work from home, flexibility of 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 typical employer benefits such as insurance and retirement plans, and typically lower per-hour rates compared to employed salary earners.