According to a study by the Freelancers Union , over 53% of the American workforce is involved in some kind of freelance work.
There are now more incentives for freelancers to strike out on their own with the Tax Cuts and Jobs Act passed by the United States Congress in December 2017. Many freelancers who operate using a partnership, S Corporation, or even as a sole proprietorship structure will have a lower tax liability while the law is in effect, and the Act is set to expire in 2025.
Businesses sometimes pay freelancers (working as independent contractors) a higher pay rate than W-2 employees for a given project, which results in a higher taxable income for the freelancer. One of the drawbacks to freelancing is accounting for the various types of taxes you’ll have to pay, including:
- Federal taxes
- State taxes
- Social security taxes
- Medicare taxes
Freelancers also forfeit company-provided employee benefits such as health insurance, paid time off, and retirement plans, among others. They are typically hired to complete a specific project for a set amount of time, rather than perform consistent work as an employee. Full-time freelancers must pay for their own insurance, and fund retirement plans as individuals.
Many workers, however, are opting to combine both styles of work. In addition to having a full-time job with a consistent salary and healthcare benefits, many are also juggling freelance projects as part-time, independent contractors for extra income. If you work as a salaried worker and a freelancer, you must file a Form 1099 along with your regular tax return.
Here’s what to expect when you have both 1099 and W-2 income, plus some ways to simplify your business and personal tax returns at the end of the year.