Thanks to the growing prevalence of the gig economy, more and more Americans are exploring the world of freelance work. Over 50% of working Americans will enter the gig economy over the next five years, and most Americans are open to the idea of becoming freelancers. If you own a small business, using freelancers can provide useful tax advantages. Find out more below.
Tax benefits of using freelancers
When you hire an independent contractor instead of an employee, you save money in many ways. For one thing, you don’t have to provide them with health care or disability insurance coverage. You also don’t have to spend money on any office or business supplies. They are responsible for when, where, and how they work—and for their own materials.
On top of that, freelancers are in charge of managing their own taxes and expenses for the IRS. When you pay a normal employee, you have to take out their state and federal taxes. With an independent contractor, you don’t have to worry about these deductions. You also don’t have to pay FICA taxes, or Medicare and Social Security.
To set up a freelance working arrangement, simply provide them with an independent contractor agreement and a 1099 form. Such workers are not salaried but usually paid on an hourly or project-by-project basis. After agreeing on terms of payment, they will invoice you for their goods or services rendered, and you simply pay the amount without additional payroll calculations.
Classification of freelance employees
While hiring independent contractors over employees clearly has advantages, there are strict rules governing the distinction between these two types of workers. If you mistakenly classify an individual as a freelancer when they are in fact working on what would be considered an employed basis, you risk getting fined by the taxman. The IRS has conducted investigations into employers in the past to ensure they aren’t abusing independent contractors.
To assure that the worker meets freelancer status, certain criteria must apply in terms of the behavioral and financial control you exert over them—and the agreed-upon working arrangement. In short, you can’t make any demands in terms of when, where, and how much the individual works. You also can’t make guarantees that the position will occur for an indefinite amount of time, or that will be classified as permanent employment.
To stay on the safe side in case of an IRS audit, there are certain behaviors to avoid when working with independent contractors. Set a duration of the job before hiring the freelancer to avoid any confusion. While you can set deadlines, try not to control when they do their work. Finally, understand that since freelancers aren’t permanent employees, they are free to pursue other work while working for you.
Finding freelancers for your business
With these tips in mind, you can take advantage of the tax benefits freelancers offer without worry. There has never been a better time to dive into this market. Thanks to the uptick in the gig economy, it’s easier than ever to find qualified workers. You can find skilled freelancers quickly online in just about any field, from administrative assistants and web developers to graphic designers and marketing specialists.
With freelancers making up 35% of the U.S. workforce, according to Forbes, you have a great wealth of eager workers at your fingertips. Follow these guidelines to hiring freelancers as a small business owner, and you will find your HR and payroll processes significantly simplified. This gives you more time to focus on delivering your core business goods or services—and can help guarantee greater success overall.
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