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Freelance Work and Tax Deductions
How does this work?
FourDegreez




msg:3386445
 11:05 pm on Jul 4, 2007 (gmt 0)

Let's say I find a freelancer through one of those sites and pay him or her to complete a project for me. At the end of the year I want to deduct this expense from my taxes as a business deduction. What is the proper way of doing this? And does it make any difference if the freelancer is from a different country?

Sorry if this is a silly question, but I'm a first-timer at this.

 

andye




msg:3386786
 10:49 am on Jul 5, 2007 (gmt 0)

What country are you in?

FourDegreez




msg:3387405
 1:25 am on Jul 6, 2007 (gmt 0)

Sorry, USA

syber




msg:3387417
 1:43 am on Jul 6, 2007 (gmt 0)

You would list the expense on Schedule C - Profit or Loss From Business (http://www.irs.gov/pub/irs-pdf/f1040sc.pdf) with your tax return. It should not make a difference that the freelancer is from a foreign country.

dickbaker




msg:3387458
 3:25 am on Jul 6, 2007 (gmt 0)

If the freelancer is in the US, you must send him/her the IRS form (I forget the form number) for him/her to report to you the person's status as a business: sole proprietorship, LLC, C Corp, etc.

If the freelancer is a sole proprietorship, and you paid that freelancer more than $600 in a calender year, then you must send the freelancer a form 1099 by January 31st of the following calendar year. The 1099 would list all payments to the freelancer. It's up to him/her to break out expenses versus net income.

I don't know what state you live in, but here in Wisconsin, the Department of Workforce Development takes a close look at "independent contractors." I've had three audits from the DWD in the last 15 years.

WI has some very strict guidelines on what constitutes an "indepedent contractor."

1. If the person has another job from which payroll taxes are withheld, then that person is not an independent contractor, and any company paying the person for any services must withhold unemployment taxes. (Which opens up a whole can of worms when it comes to IRS investigations).

2. The person must make himself/herself available to other companies for the same services.

3. The person must have worked for other companies within the past year. If you're the only one who used that person's services, then you're that person's employer.

4. The person must advertise his/her services via direct mail, directory advertising, leaflets, or other means.

5. Does the independent contractor have his/her own workmen's compensation insurance? If not, the DWD may decide that the person is not independent.

Again, Wisconsin is really tough about the definition of "independent contractor."

But if you just assume your freelancer is an independent contractor, you could wind up on the hook for a few hundred dollars. Or maybe more.

skibum




msg:3387521
 6:13 am on Jul 6, 2007 (gmt 0)

Gotta make sure to stay out of Wisconsin! OMG

dickbaker




msg:3388262
 3:29 am on Jul 7, 2007 (gmt 0)

skibum, why do you think I'm trying to get out of this state? Wisconsin is in the top five for states confiscating the largest percentage of income in taxes.

But Wisconsin is not alone in trying to collect as much as possible from companies that employ "independent contractors."

The "independent contractor" status has been used so many times that the various state governments have figured out how to squeeze even the smallest of companies for extra dollars.

Let's say that you hire me to do some SEO work on your website, and you pay me an amount in excess of $600. And you say that I'm an independent contractor.

Well, the state just lost out on 5.56% in unemployment insurance on what you paid me.

The state may also have lost out on 5.5% on taxable sales, via the sales tax. Where you the end user of my services? If so, then you should have paid sales tax on the amount you paid to me.

And then there's the fed's. If I'm not actually an independent contractor, then you should have withheld .0765% of what you paid me for FICA, and paid another .0756% in co-FICA from your own account.

And, at the end of the year, you'd be liable for federal FUTA (federal unemployment tax) on the amount you paid me.

Governments tax everything. My city taxes my dog. They don't call it a "tax," but it is.

FourDegreez




msg:3395984
 4:39 pm on Jul 16, 2007 (gmt 0)

Thanks dickbaker, that's the kind of info I was looking for (and was afraid of). I guess if the work is done by someone outside the US, none of that applies? What you describe seems like a beaurocratic nightmare to me. I wouldn't know where to begin.

LifeinAsia




msg:3396011
 4:57 pm on Jul 16, 2007 (gmt 0)

Well, the state just lost out on 5.56% in unemployment insurance on what you paid me.

And then there's the fed's. If I'm not actually an independent contractor, then you should have withheld .0765% of what you paid me for FICA, and paid another .0756% in co-FICA from your own account.

Trust me, the government is smarter than that- they'll still get it from you on your return. True, you'll probably reduce the amount quite a bit with your own deductions.

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