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How Do You Define "Freelancer"?
by Kathy Ide Occasionally, you may see ads for freelancing positions that require the person to work "full time in house." You may wonder, If a person is working full time at the company's location, how can that be considered freelancing? The key factor that determines whether a worker is a freelancer (a.k.a., independent contractor) is, who has the right to control how the work is accomplished? The Internal Revenue Service has developed twenty common factors that are used to determine, for tax purposes, whether a worker is an independent contractor or an employee. No Instructions. Independent contractors are not required to follow, nor are they furnished with, instructions to accomplish a job. No Training. Independent contractors typically do not receive training by the hiring firm. They use their own methods to accomplish the work. Others can be hired. Independent contractors are hired to provide a result and usually have the right to hire others to do the actual work. Independent contractor's work not essential. A company's success or continuation should not depend on the service of outside independent contractors. No time clock. Independent contractors set their own work hours. No permanent relationship. Usually independent contractors don't have a continuing relationship with a hiring company. The relationship can be frequent, but it must be at irregular intervals, on call, or whenever work is available. Independent contractors control their own workers. Independent contractors should not hire, supervise, or pay assistants at the direction of the hiring company. If assistants are hired, it should be at the independent contractor's sole discretion. Other jobs. Independent contractors should have enough time available to pursue other gainful work. Location. Independent contractors control where they work. If they work on the premises of the hiring company, it is not under that company's direction or supervision. Order of work. Independent contractors determine the order and sequence in which they will perform their work. No interim reports. Independent contractors are hired for the final result only. They should not be asked for progress or interim reports. No hourly pay. Independent contractors are paid by the job, not by time. Payment by the job can include periodic payments based on a percentage of job completed. Payment can be based on the number of hours needed to do the job times a fixed hourly rate. Payment method should be determined before the job commences. Multiple Firms. Independent contractors often work for more than one firm at a time. Business expenses. Independent contractors are generally responsible for their own business expenses. Own tools. Independent contractors usually furnish their own tools. Significant investment. Independent contractors should be able to perform their services without the hiring company's facilities (equipment, office furniture, machinery, etc.). Services available to the public. Independent contractors make their services available to the general public. Profit or Loss possibilities. Independent contractors should be able to make a profit or a loss. Employees can't suffer a loss. The independent contractor has his own office, equipment, materials, or facilities, and his services affect his business reputation. Can't be fired. Independent contractors can't be fired so long as they produce a result that meets the contract specifications. No compensation if the job isn't done. Independent contractors are responsible for the satisfactory completion of a job or they may be legally obligated to compensate the hiring firm for failure to complete. These are the conditions the IRS considers in an audit to decide whether a person is an employee or an independent contractor. Freelancers do not have to satisfy all of the twenty factors. Each one is considered as a weight on the scale. So, what difference does it make, tax-wise, if you're an employee or a freelancer? Business owners must withhold income tax on employees' wages, and they must pay Social Security tax (FICA) as well as withhold the employees' portion of the FICA. They also are responsible for unemployment tax (FUTA) and must provide the employee with a Form W-2, "Wage and Tax Statement," showing the amount of wages and tax withheld for the year. Payments to an independent contractor that total $600.00 or more for the tax year must be reported by the business owner on Form 1099-MISC, "Miscellaneous Income," and filed with the IRS. A copy also must be given to the independent contractor. So, if you paid an independent contractor more than $600 in one tax year, you are required to file a 1099 and send a copy to that freelancer. (For example, if I hire a maid service to clean my house so I can write and edit, and I pay them more than $600 in one tax year, I have to file a 1099.) If you received more than $600 in one tax year from a single organization, that company should send you a copy of the 1099 they filed. Does this mean the only income you have to report, as a freelancer, is what's been reported through a 1099 by those organizations that have paid you? No way! By law, you must report as income everything anyone paid you to do your job. If someone gave you $5.00 to do a quick proofread of an article, you need to count that $5.00 as income. If you referred an editing job to another editor, and that editor paid you a $2.50 referral fee, that $2.50 counts as income for you (and as an expense deduction for him/her). The tax laws for freelancers are extremely complex, so you should consult with a tax attorney if you have any questions about how these issues apply to you. ABOUT THE AUTHOR: Kathy Ide edits, critiques, and proofreads fiction and nonfiction manuscripts including short stories, play scripts, screenplays, devotionals, articles, and book-length works. She also speaks at writers conferences across the country. She is the author of Christian Drama Publishing, Polishing the PUGS: Punctuation, Usage, Grammar, and Spelling, and the soon-to-be-released Typing without Pain. Her works have been published in numerous magazines, compilations, and script collections. For more information, check out her Web site: http://www.KathyIde.com See "WorldWideWeb Tax," www.wwwebtax.com |
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