For all the ink spilled in the media about the “gig economy,” it looks like the freelance revolution is here to stay. If anything, the freelance workforce is poised to grow: A recent Upwork study found that approximately 59 million Americans worked as freelancers during the past year and collectively earned around $1.3 trillion. In other words, if you’ve been considering hiring some freelance workers, you’d be in good company.
Freelancers offer specialized skills and quality services at affordable rates, especially when you consider that they require almost no supervision or overhead investment. Clearline Interactive explains that one of the biggest advantages to hiring freelancers, however, might be the tax benefits.
Independent Contractor Criteria
Before you get too excited about tax savings, it’s important to take a moment to be sure your freelance workers are correctly classified as independent contractors. Workers can be legally considered employees even if they label themselves as independent contractors. Misclassifying an employee as an independent contractor could get you flagged by the IRS or other government agencies, and you could be subject to fines, penalties, back taxes, and interest.
The IRS has a lengthy set of criteria for classifying workers, but in general terms, employee status is mostly a matter of control. The more control you have over a person’s work, such as when and where it’s performed or the tools and methods used, the more likely the person is to be considered an employee.
Tax Advantages of Hiring Freelancers
Compared to full-time employees, freelance workers make things much easier on you at tax time. Here are some of the top ways hiring freelancers helps with your taxes.
- No FICA contributions: Under the Federal Insurance Contributions Act, your business must pay a 7.65% payroll tax for each employee, which covers half the employee’s Medicare and Social Security taxes. Independent contractors cover these expenses themselves through self-employment taxes.
- Optional benefits: While you may choose to offer benefits to a freelancer as part of your compensation package, there are no mandatory benefits for freelancers like there are for some employees. With no required health coverage, family leave, paid time off, or overtime, your savings add up quickly.
- No unemployment or workers’ compensation: Workers’ compensation insurance, which you must pay for each employee, isn’t required for freelancers. The same is also true for both federal and state unemployment taxes.
- Easier tax reporting: Unlike the vast tax reporting paperwork required for employees, the IRS’ requirements for freelancers are minimal and straightforward.
- Streamlined payroll: Because there’s no withholding required for freelancers, there are no percentages to calculate, taxes to deduct, or totals to keep up with.
Other Tips
Hiring freelancers isn’t the only way to save time and money on your taxes. Investing in quality tax and accounting software is a smart move, especially if the software is integrated with your payroll platform. Your business can also save on taxes by using the right corporate structure. By forming a limited liability corporation, for example, you can utilize the pass-through taxation option, which means you pay taxes at your individual income rate and avoid corporate income taxes. States have varying LLC formation rules, so find out how to register for an LLC to get it right.
Keep in mind that you can span the globe to find capable freelancers, which may not be a tax advantage but can help your business save and grow. For instance, if you’re interested in hiring qualified freelancers in a country like India, a site like Guru allows you to browse through thousands of available professionals for free.
If you’re worried about project accountability when it comes to freelance workers, remember that you can use project management tools to help everyone stay on track. In fact, you can create a process map that enables you to monitor progress and deadlines, and when you share it with your freelancers, everyone stays in the loop. Using a process map template allows you to customize your map to your specific needs, and as a living document, you can always make adjustments.
Taking advantage of the nation’s growing wave of available freelance work can mean affordable access to expert-level work production for your company. It can also save you money and headaches during tax season.
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