Normally, filing taxes is pretty uneventful for me on the freelancing side. That’s because I log my expenses as I go. So when it’s time to tell Uncle Sam how much I owe him, I’m prepared. I send my CPA a list of the business expenses I incurred, in several different categories. I also include the total of all the freelance income I received. It literally takes five minutes.
This year is a little different though. As if Covid-19 hasn’t changed enough of our lives, even taxes for freelancers will be a bit different this time around. Here are a few new things that every freelancer should watch out for when they complete their 2020 tax return.
There’s a New Form in Town: 1099-NEC
All your freelance income used to be reported to the IRS via form 1099-MISC. For tax year 2020, freelancers will be getting a new form called 1099-NEC. This form should come the companies that paid you. The IRS decided to add this new form because there were two deadlines to file the old 1099-MISC, depending on what type of income is being reported. Unfortunately, this created confusion when even the IRS system couldn’t distinguish between the two deadlines. Their system would send out a bunch of erroneous delinquent notices to businesses, even when they were following the rules.
The new forms are simple enough. It’s very similar to the old one, actually. There shouldn’t be much issue figuring out what to report to the IRS for freelancers. However, here are some additional important tips.
Don’t Mix Up The Forms
Make sure you don’t get both the 1099-MISC and 1099-NEC for the same income. It’s possible that some businesses would make a mistake and give you a 1099-MISC and a 1099-NEC for the same income. As these forms are submitted to the IRS, you want to make sure they don’t essentially tell Uncle Sam that you made double what you were actually paid. As always, it’s imperative that you tell accounting to correct the mistake as soon as possible. Don’t just toss the 1099 mailing aside to be looked at later.
Triple Check and Ensure Things Match
As usual, double check your numbers and make sure they are correct. If they aren’t, get in touch with the company that paid you and get it fixed. Again, don’t wait until the last minute to do this.
You will also want to match your filing to what companies are reporting to the IRS. But why do you need to be careful here, when the numbers are literally right on the form? Let me tell you what I mean.
A few companies I work for pay me electronically. There are middlemen (ie, PayPal) who charge a fee for transferring those funds to my bank account. For tax purposes, I’m tempted to report the amount I ultimately received after fees. It’s just easier that way. Plus I don’t have that money to spend anyway. However, I really should report the entire amount that I was initially paid, and then report the fees as an expense.
You also want to make sure the income total you are reporting is what the company is listing on the 1099-NEC. If they used the amount before fees, then do what I just outlined. If they are just using the amount after fees were taken out, then you might want to report it to match theirs. Just don’t also report the fees as an expense, since it would raise alarms unnecessarily.
Don’t Forget About Unemployment Benefits
Freelancers normally don’t qualify for unemployment benefits. However, the CARES Act signed into law early in the pandemic allowed freelancers to qualify for benefits via Unemployment Assistance (PUA). What many people don’t realize, though, is that the benefits, including any additional assistance (the $600 and $300 extra weekly Federal benefit) is taxable.
If you received PUA in 2020, then expect to get a Form 1099G. Even if you don’t, you still have to report that as income. The good news is that some states don’t tax unemployment insurance benefits. Other only tax a portion of it. The bad news is that there’s only a handful of states that gives unemployment insurance special tax treatment. California, for example, is one of the few states that don’t tax the benefits. The state that you live in may or may not tax unemployment benefits. Don’t assume that your state won’t try to take a bit out of your benefits.
Your Home Office Deduction May Be Higher This Year
As a freelancer, you may already have been working at home before the pandemic. So nothing’s really changed for you. However, it’s in your best interest to figure out whether you re-purposed any part of your home for work in 2020. As a reminder, any space that’s dedicated for your business activities can be included when you calculate the home office deduction.
You know, I sometimes wonder whether I should just file taxes myself. My taxes really are fairly simple and easy to do. But then again, there are so many changes to the tax year. I’m usually happy to pay someone to help me file the forms. Then if I’m ever in doubt of what to do, I can always fire an email off to my CPA to have my questions answered. Having someone to double check my interpretation of the tax laws — and my entire return — also helps.
There’s still a chance I will file my taxes myself in 2021. If I do, though, I will be sure to pay extra attention this year. The pandemic created quite a few changes for freelancers. The last thing I want is to raise some alert in the IRS system because I made a mistake or forgot to include something.
The Bottom Line
The past year has changed the realities of work for a lot of us. Whether we transitioned to working from home or found ourselves freelancing to make some extra cash, doing our 2020 taxes could have more complications than you previously had to deal with. While we do believe that doing your own taxes is a worthwhile exercise, things can get confusing in a hurry. If you’re unsure of exactly how to make sense of the new changes (in a drastically changed world), you should definitely get in touch a professional. A certified tax preparer can answer any questions you might have about how to file your taxes as a freelancer.