Filing taxes is a dreaded endeavor for anyone, but if you’re a freelance creative working as a 1099 independent contractor, the process can be overwhelming. Doing your taxes can seem like the opposite of creativity, so it is not surprising that those working as freelance creatives would find the tax process particularly unpleasant: According to a recent report, freelance creatives and art entrepreneurs say that managing their taxes and other financial obligations is one of the hardest aspects of their business. That’s especially true because until recently, art education did not provide this kind of training, which is a sentiment illustrated in this report.
Filing taxes doesn’t have to be a complicated process, and it doesn’t have to be insurmountably costly, either. While it’s true that many freelance creatives opt for hiring an accountant come tax season, not everyone needs to. Filing your taxes as a freelance creative with multiple 1099 independent contractor forms can be simple, so long as you have the proper structures in place. Whether you already have a corporate setup in place or need the lowdown on how this structure can help you keep your tax payments low, we’re here to help. Here’s a breakdown of what freelance creatives need to know come tax season.
Why 1099 Independent Contractors Should Set Up a Company
As a freelance creative, you are likely used to receiving contracts and invoicing documents each time you land a new gig. It’s likely that your new clients also request documentation on your behalf that signals that you’re to be considered a 1099 independent contractor on your freelance creative jobs. This form, called a Form W-9, asks you to state basic information, such as your name, address and social security number or employer identification number. When it comes time to file your annual tax return, your new client is required to submit a 1099 form, reflecting your 1099 contractor agreement, on your behalf if they’ve paid you more than $600 within the year.
Form W-9 is a crucial document because it states how you will be paid as a 1099 independent contractor, and it provides required taxpayer ID information that your client may be required to report to the IRS. If you’ve included your Social Security Number, then you will be paid as an individual. But if you’ve included an employer identification number, then you will be taxed as the principal owner of a business.
If you’re working as a 1099 independent contractor as a sole proprietor – meaning that, you haven’t incorporated a business, and just filled in your Social Security number on your W-9 – then you would also be responsible for paying your social security and Medicare taxes. In addition, a freelance creative working as a sole proprietor would be held personally liable for any issue that may arise throughout the course of business – that means that any and all assets, like a home or a savings account, would be up for grabs if sued.
And while your corporation may have just one employee – you – you are often better off setting up a corporation, such as an LLC, in order to effectively structure and protect your work.
Registering as an LLC is Easy, and May Provide Tax Benefits
Most first-time business owners elect to establish an LLC for its tax benefits. An LLC, or limited liability company, is a business structure in which the members of the company cannot generally be held personally liable for the company’s debts or liabilities, just like a corporation, except they do not require the same degree of formality typically required of corporations. Limited liability companies are essentially hybrid entities that combine the characteristics of a corporation and a partnership or sole proprietorship. The central feature of an LLC is its elective tax status that enables it to choose how to be taxed, the most common of which are: disregarded entity, S-corp, and C-corp.
Setting up an LLC is relatively easy and fairly cost effective. It’s a common misconception that setting up an LLC requires legal representation. In most states, setting up an LLC is as easy as visiting your state’s division of corporation’s website, and selecting the option that allows you to start your business.
Most states charge an annual filing fee under $200, and few require an operating agreement. You’ll need to come up with an entity name (most people simply choose their name, but feel free to come up with something catchy) and your articles of organization. Most times, the state makes it easy to file your articles of organization by having you fill out an online form that states basic information about your company: Your mailing address, the company’s officers (you, and anyone else that may be going in on this venture with you) and any other information the state determines necessary. Most freelance creatives won’t need to obtain a business license or permit to operate but check with your state and city or town to confirm.
Tax Deductions Make a Difference for Registered LLCs
As an individual, your income taxes are calculated based on the amount you earn. When you work for a company as an individual sole proprietor – whether you’re full-time and on staff, or as an independent contractor – you are responsible for paying those taxes. The IRS has created tax brackets to determine how much an individual should be taxed for federal income taxes, social security, and Medicare. For example, the first four tax brackets for a single unmarried a person are:
|$91,901 – $191,650||28%|
However, there is a common misconception that reaching a tax bracket results in a person paying the higher tax rate on their entire income. If you earn $50,000, you would reach the 25% bracket and your entire income is taxed at 25%, which is $12,500. However, this isn’t necessarily true. We have a progressive tax system, where only the income within a bracket is taxed at that bracket’s rate.
For example, if you are a single, unmarried individual earning $50,000, then your taxes are calculated like this:
- First, you pay 10% of the $9,275 in the first bracket. That is $927.50.
- Then you pay 15% of the profit in the second bracket. ($37, 650 – $9,275 = $28, 375.) So, 15% of $28,375 is $5,183.75.
- Then, the profit from the third bracket is only for the earning over $37,650. ($50,000-$37,650 = $12,350) So, 25% of 12,350 is $3087.50.
- Add those figures up ($927.50 + $5183.75 +$.3087.50) and your total is $9198.75.
This concept is the same for businesses, however, the tax rates are lower with earnings up to $50,000 only being 15%.
The other important concept here is that the IRS only requires taxpayers to pay taxes on their profit, not necessarily your billings. Running a business requires a certain amount of overhead – from office space to printing supplies, your freelance creative business requires you to spend money so you can earn it. All of those expenses are deductible from your total income (we’ll discuss what’s deductible later).
For example, let’s say you billed $50,000 as a freelance creative this year, but you spent about $20,000 on operating your business. On the IRS 1040 Form, in the Income section, you would list your wages, salaries, and tips (line 7) as $50,000, and provide the relevant documentation, i.e., all of the 1099 tax return forms you should have been sent from your various clients. Then, in the Adjusted Gross Income section, on line 27, you would list your business expenses, i.e., all that cash you spent on making your business work. The IRS would recognize your taxable income as $30,000, and you would be taxed based on that amount.
Naturally, this can become more complicated if you’re married or divorced, own property or other assets – there’s a reason no one likes tax season – but these guidelines are a useful primer for a freelance creative just beginning to understand how taxes and tax deductions work.
So What Can a Freelance Creative Deduct?
As a freelance creative, you probably already know that certain expenses can be deducted during tax season as common tax deductions. Finding more items to claim as tax deductions are often just an exercise in creativity: Even the most minuscule expense can be deducted.
First, consider your office space. Even if you work from home, you can still deduct a portion of your rent depending on how much square footage you use. Next, think about the equipment you use: printers, pens, markers, paint, canvas, software and anything else you use to make work and manage your business is fair game. Do you use your cell phone and internet to communicate with clients? Your bills are fully deductible. Do you have a retirement account you make monthly payments into? More deductions. Do you frequently attend lectures or other panel discussions, and use a car or ride-sharing service to get around? You can deduct that, too. DO you often hire other freelance creatives to help you get the work done? The money you pay them is tax deductible. Taking a client to lunch? Score some more tax deductions.
Filing your taxes is can no doubt be a complicated process, but now that you’ve got a pretty good grasp of what’s needed to save as a freelance creative, you can likely handle them yourself.
If you’re a freelance creative working as a 1099 independent contractor, tell us some of your best tax deductions advice in the comments below.