Note: If you’re on the other side of the client-freelancer relationship, here’s how to file your taxes as a freelance developer.
As Benjamin Franklin once said, “Nothing in this world can be certain, except death and taxes.” Taxes are an inevitable part of doing business, whether you’re a sole proprietor or head of a large corporation. At the end of the day, the government gets its due.
If you’re in a traditional employer-employee relationship, how to file taxes is pretty clear-cut. But, as a client of a freelance developer, it might not be as easy as simply filing a W-2 and calling it a day.
In this post, we’ll go through how US-based employers can file taxes on engagements that involve freelance software development services. We’ll discuss the different tax forms, what form to file, deadlines, income thresholds, and what’s needed from the freelancer to file taxes on their behalf.
Read on to have your freelance tax filing questions answered!
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How to File Taxes When Hiring a Freelancer
Below are some frequently asked questions about how US-based clients handle taxes when hiring both US-based and non-US-based freelance developers, as well as detailed explanations for answers.
Do I have to file anything on behalf of my freelance developer?
If you’ve employed a freelance developer and paid them over $600, you need to file a 1099-MISC on their behalf. If your freelance developer does not have a green card, is not a US citizen, or is not a resident alien, you need to have them fill out a W-8BEN to limit your tax liabilities.
If you work with a freelance developer platform, they’ll often take care of 1099-MISCs and W-8BENs for you, so you don’t have to file anything.
What is a 1099-MISC?
A 1099-MISC is used to report miscellaneous, or non-employee income, to the IRS. It’s typically used to report income earned by an independent contractor that is not an employee.
A 1099-MISC is different from a W-2 because it does not include federal/state withholdings or Social Security and Medicare taxes (because the independent contractor is responsible for paying those themselves). A 1099-MISC form has 5 parts:
- Copy A is submitted by you to the IRS
- Copy 1 is submitted by you to the state tax department
- Copy B is for your freelance developer
- Copy 2 is given to your freelance developer to file with their state tax department
- Copy C is kept by you for your records
Read More: Good Developers Don’t Always Make Good *Freelance* Developers
What is a W-8BEN?
A W-8BEN certifies foreign status in terms of tax withholding on income. This allows the freelance developer to claim tax treaty benefits, which may allow the freelance developer to be exempt from the 30% tax rate on income withholding your business would be required to withhold on his or her behalf.
When is the filing deadline?
The filing deadline is January 31st of the following year. Beginning in 2017, the tax deadlines for both the W-2 and the 1099-MISC is January 31st. You must file the 1099-MISC to the IRS and provide a copy for your independent contractor/freelance developer by January 31st.
If January 31st happens to fall on a weekend or holiday, the filing deadline is due the next normal business day immediately after.
What is the cutoff amount for tax filing?
If you’ve paid your freelance developer or software engineer hired as an independent contractor more than $600 for work done in a given year, you need to file a 1099-MISC to the IRS and provide a copy for your freelance developer by January 31st so that they can file their taxes.
What do I need from the freelance developer to file the 1099-MISC?
If your freelance developer is subject to US taxes, you need them to fill out a W-9 so that you can file the 1099-MISC. If your freelance developer is not subject to US taxes, they need to fill out a W-8BEN.
What happens if I don’t file a 1099-MISC?
As an employer, if you don’t issue a 1099-MISC to your freelance developer or independent contractor by January 31st, or file one incorrectly, the penalty varies from $50 to $260 per form, depending on how late you file.
Read More: Hiring Developers Online: Freelance vs Recruitment Agencies vs In-House
Conclusion
While all these tax forms and environmental variables may seem overwhelming at first, with preparation and some research, filing taxes when hiring a freelancer correctly and on time (to avoid penalties) is not as intimidating as it seems.
The IRS has information and resources available on its website, and, if you don’t have a CPA, they can also walk you through the steps when you require additional help.
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