The new year is just one month old and it’s already time to think about filing taxes. Ugh! Then again business owners, including Freelance consultants, must usually file quarterly taxes so we often have our minds on the subject. As we know, planning is key (for all of life and business!) and the purpose of this post is to support your tax planning.
Let’s start with the question of whether or not you’ll file a 2021 tax return. If any one client paid you at least $400 in total during the year, you must file a tax return. Why is $400 the filing trigger point and not $600, the well-known earnings threshold for paying income tax?Because Freelancers are required to pay self-employment taxes in addition to regular income tax on the revenue you generate (minus business expenses and a few other deductions). While you may not owe income tax on the $500 project you billed, you’ll pay self-employment taxes on that amount.
The Internal Revenue Service compels Freelancers to file taxes like a business owner. In addition to the standard income tax based on your tax bracket and filing status, you are obliged to pay the self-employment tax of 15.3%, which constitutes the Social Security and Medicare taxes that everyone who works must pay, and also pay the half that’s covered by a traditional employer (this requirement does not apply to Freelancers who have U. S. clients but are not U.S. citizens and do not reside in the U.S.).
Clients pay to you the entire amount of the agreed-upon project fee and do not withhold taxes. Total earnings received from each client are reported on a Form 1099-NEC that is sent to you by each client no later than January 31. Freelancers pay the self-employment tax directly to the IRS, on your own.
Now you probably have business expenses to factor into your revenue earned, so if you’re a part-time, occasional Freelance moonlighter, you might not owe either income or self-employment taxes. File Schedule C or Schedule C-EZ to calculate and report business expenses to your state’s Department of Revenue and the IRS.
Freelancers and other business owners who expect to owe $1000 in taxes in a given year must also pay an estimated quarterly tax because, again, no portion of Freelance income is withheld by clients and applied to taxes that are presumably due. IRS Form 1040-ES will help you calculate how much you’ll owe in estimated taxes each quarter. It’s beneficial to you when your estimated quarterly tax is close to reality because if you underpay, you’ll owe the IRS the remaining balance when you file the annual tax return (by April 15). Habitual underpayment of quarterly taxes can cause you to be penalized and compelled to pay a fine, along with taxes owed.
Finally, heads up if you use services such as PayPal or Square to accept invoice or other client payments. Be advised that new tax reporting changes affecting these platforms are now in effect. A new tax ruling gives the IRS information on income that Freelancers and other small businesses proprietors receive via transactions on payment applications.
As of January 1, 2022, businesses that receive payment of $600 or more per year for goods and services purchased through payment apps such as Venmo, Square, PayPal and Cash App will receive Form 1099-K so that the IRS can be assured that you will include those payments in your taxable revenue. In an effort to reduce the amount of unreported taxable income flowing through these payment platforms, the IRS now requires payment app businesses to report on Form 1099-K each of their user’s business transactions (defined as a payment for a good or service). The threshold for reporting was previously 200 transactions per year amounting to a combined total gross payments of at least $20,000.
By lowering the reporting threshold, peer-to-peer payment applications must now report income if a user earns more than $600 from the sale of goods or services in one year. This change applies only to “income received from goods and services,” meaning it does not apply to gifts and other personal transactions, such as reimbursing friends and relatives for rent, dinner, or other social expenses.
If you use payment apps for non-business transactions and you receive a 1099–K. from one of these platforms, examine it carefully and be prepared to clarify your activities with the IRS. There may be a chance that some of your transactions will be reported twice or somehow inaccurately, since these reporting requirements are new. Check carefully the 1099–Ks you receive from your payment apps as well as the statements you receive from clients who use the apps to pay you. Again, be prepared to explain to the IRS that the two 1099-Ks are for the same transaction.
Let’s finish up with a peek at important 2022 tax filing dates to remember:
· January 31, 2022 – Deadline for clients to send Form 1099–NEC to Freelance consultants
· March 15, 2022 – Deadline for partnership tax returns (and LLCs taxed as a partnership) and S-corporation tax returns
· April 18, 2022 – Deadline for 2022 Q1 estimated tax payments. It’s also the deadline for C-corporation, sole proprietor (businesses you report on a schedule C) and individual tax returns. If you file an extension for the deadline, the Individual Tax Return Extension Form is due on April 18.
· June 15, 2022 – Deadline for 2022 Q2 estimated tax payments
· September 15, 2022 – Deadline for 2022 Q3 estimated tax payments
· October 17, 2022 – Deadline for 2021 individual tax returns that received a filing extension
. January 15, 2023 – Deadline for 2022 Q4 estimated tax payments
Thanks for reading,
Kim
Image: Mohamed El Korchi as Matthew, a tax collector who, after a monumental pivot and rebrand, would go on to become a saint, in the Lumo Project, an educational resource designed for anyone interested in the Bible’s four books of the Gospel.