Discover how you can work legally in the USA so that you can grow your career or business. As a freelancer in the USA, you will be in charge of filing and paying your taxes, planning your personal finances, and managing your cash flow.
According to a 2019 survey by Upwork, the US has a freelance workforce of about 57 million. Collectively, they contribute about $1 trillion to the American economy.
You are a freelancer if you work as an independent contractor, gig worker, contract worker, or even a subcontractor. The law considers you a small business owner, instead of an employee.
In that regard, the laws that govern employees’ terms of employment do not apply to you. You can work with multiple clients, and the clients have no obligation to pay you employee benefits.
The exception is where the state or local law clearly states that you have to be treated as an employee. For instance, local and state laws in California, and New York City, have placed certain conditions for employers who hire freelancers.
According to California’s AB5 law, a client has to treat a freelancer as an employee, once they receive more than 30 submissions of work. California enacted the AB 5 employment law in September 2019 and came into effect on January 1, 2020.
Most media and technology companies receive hundreds of submissions from freelancers monthly. This is why the affected employers are no longer taking freelancers based in California. For CA freelancers, that means lost work opportunities.
If you freelance from New York, then your business is under the Freelance Isn’t Free Act, which came into force on May 15, 2017. The Act states that all contracts valued at $800 and above are in writing.
Furthermore, it requires employers to pay the full amount on the date specified on the contract. Alternatively, they must make payments within 30 days after service delivery, if the contract does not specify a date.
Employers risk exposure to liabilities such as fines for late payment, attorneys’ fees, and statutory damages. Overall, the act aims to protect freelancers from exploitation, and ensure taxes freelancers pay their taxes on time.
As a freelancer, the IRS expects you to pay your taxes as businesses do. You will have to pay self-employment tax, as well as make some deductions on your taxes, where applicable.
You need to report all your income to the IRS, even if you think you do not have any tax obligation for that source. As a freelancer, you will have many sources of income, which can be from local clients or from overseas.
Therefore, it is easy to lose track of your earnings, if you selectively report them. As a freelancer, instead of getting the W-2 form for reporting your taxes, you will get multiple 1099-MISC from your clients.
Moreover, the IRS requires that everybody who is working in the USA pay their taxes, even if they are illegal immigrants. To do that, you need to apply for and get your IRS tax identification number.
According to the IRS, once you receive your 1099-MISC, as an independent contractor or freelancer, you will need to fill three forms. The type of form to fill will depend on when you plan to pay your taxes, and whether your earnings are $400 or more.
You use the Schedule C (Form 1040 or 1040-SR) form to report your income as an independent contractor or freelancer.
You also need to file Schedule SE (Form 1040 or 1040-SR), if your earnings are $400 or more. The form also helps you to determine how much social security and Medicare tax you need to pay on your income.
You need to file an estimated tax income using Form 1040-ES if your income is not subject to withholding. This includes freelancing, dividends, rents, alimony, interest, etc.
Once you have not made timely estimated tax payments, then you also need to fill Form 2210. The form helps you to see if you have unpaid taxes and penalties, and the total amount you owe the IRS.
When paying your taxes, you can deduct any necessary expenses that you incur while running your freelance business. However, these expenses must be essential to running your freelance business. These include:
Items that you would own or pay for even without being a freelancer do not qualify as deductibles. For instance, you can deduct the cost of using your home office, if you only use the space/room for your freelance work.
However, if space also doubles up as a family study room, then you cannot write it off as a freelance expense. You also cannot deduct your internet bill, if you also use it for home entertainment as well.
Freelancers and small businesses are required to pay their taxes 4-5 times annually. This requirement applies to a freelancer in the US, who is a sole proprietor, or a sole owner of a limited liability company (LLC).
As a freelancer in the US, you must file and pay your taxes by mid-April. You then have to make quarterly payments by mid-June, mid-September, and mid-January. You do not need to fill any forms when making quarterly payments.
If as a freelancer you have registered a corporation or LLC with multiple owners, you have to file your taxes twice. You have to file for yourself as an individual, and then for your corporation/LLC, separately.
While freelancers can work from outside the USA, they need to get an employment-based immigrant visa to work on US soil. You can check this page for details on how to immigrate and work in the USA.
Apart from working obtaining a work permit, international freelancers will need to have the following:
Most US clients/businesses prefer to work with freelancers who have a US bank account, TIN, and physical address. That makes filing their taxes easier, and they do not have to justify why they hired you to their local or federal authorities.
The exception is when they work with you on outsourcing platforms such as Upwork, Guru, or Freelancer. The platforms have the required licenses that allow them to facilitate work transactions between freelancers and US clients.
To work as a freelancer in the US legally, you need to be a resident or have an immigrant visa that allows you to work permanently or temporarily in the United States.
However, whether you have an approval to work in the US or not, once you do freelance work on US soil, you must pay taxes on your earnings.
IRS can give you a TIN free, even if you do not meet the legal requirements to work in the US. You can use it to submit your taxes, to avoid tax evasion charges. You may also need to open a US bank account to receive your tax refunds and payments from some businesses.
We hope that you found this guide to be informative, and you will enjoy growing your freelance business.