As a freelancer, you want to be sure that you operate your business as an independent contractor should you ever be audited by the IRS. This status allows you to deduct important business expenses, such as a home office, medical insurance payments, computers and related equipment, office supplies and travel for research or interviewing experts.
In order to protect your independent contractor status, you must be sure that you do not appear to the IRS to be an employee of the companies with which you are working.
The IRS and Fair Labor Standards have identified a few crucial differences between independent contractors and employees, including:
- Independent contractors control their hours of work
- Employees are paid hourly or monthly, and the employer withholds tax contributions.
W-2 Form: Wage and Tax Statement
If you work for a company as an employee and earn more than $600 per year, your employer will issue you a W-2 form. The form includes information about your employer, the amount you earned that tax year, and how much taxes (federal taxes and FICA to fund Medicare and Social Security) your employer withheld from your pay. The employer pays one-half of the employee’s FICA taxes.
The W-2 is to be in the mail or distributed to employees no later than January 31for the prior year.
W-9 Form: Request for Taxpayer Identification Number and Certification
The W-9 is a form that you complete at the beginning of a contract. It is basically an agreement that you as a freelancer or independent contractor, agree to pay your own taxes. It provides information to the company you are providing services to, such as your legal name, address, social security number or the EIN of your business. This form is used by the company to report how much you were paid during the year. The company does not withhold taxes from your pay and does not pay any of your FICA tax liability, so you will need to make periodic payments of your federal and FICA taxes to the IRS based upon what you anticipate earning that tax year. You must earn more than $600 during the tax year from your contract in order to be required to complete a W-9.
1099 Form: 1099-NEC (Nonemployee Compensation)
Since 2020, independent contractors or freelancers are issued 1099-NEC forms by the company they have worked with. The 1099-NEC identifies the gross amount that was paid to the independent contractor during the tax year. Prior to 2020, a 1099-Misc (Miscellaneous income) used to be issued. W-2 Employees do not receive a 1099-NEC.
There are approximately 18 different forms of 1099s. The type of income that is being reported determines the form that is used. For example, income from investments or rental properties are each reported on a separate 1099. It is possible that you will receive multiple 1099 forms at the end of a tax year, depending upon your sources of income.
Summing It Up
Independent contractors or freelancers must complete a W-9 for income earned from a company that exceeds $600. A W-9 provides the independent contractor’s personal information and is an agreement that the independent contractor will pay all taxes on any income that is earned.
A 1099-NEC is issued to independent contractors by the company they worked with. It provides the total gross income earned that tax year and is attached to the independent contractor’s income tax return.
Employees are issued W-2 forms by their employers, which list the income earned and the federal and FICA taxes withheld. Employees do not receive 1099-NEC forms.
It is possible if you have other income, such as earnings from an investment or rental property, you may receive a different kind of 1099. This income has nothing to do with your employment or independent contract work.