Many people talk about tax deductions (expenses), but it’s also important for you to track your revenues as well. While your customers will likely report your earnings to the IRS, there are quirks in the way those forms work which means they may not capture all of the income or they may double count it. To ensure you don’t underpay or overpay your taxes, it’s important for you to track your revenues. It’s also important for you to know how your revenues are trending, so that you can monitor how your business is performing and be able to grow it over time!
The most common forms that you are likely to see in your work as a freelancer are the 1099-NEC (fka the 1099-Misc) and the 1099-K. When you start working with your client, they may ask you to fill out a W-9 form and provide your TIN (tax identification number) or social security number. The W-9 form just provides the client with the information they’ll need to file their 1099 tax forms at year end. The client will use your TIN or social security number to report your earnings to the IRS. If you don’t provide a TIN, the client may withhold 24% from your earnings and send it to the IRS.
All 1099s serve to report your income to the government; however, there are key differences. We’ll give a brief overview of both.
1099-Misc reports miscellaneous income, and prior to 2020 this was the form you’d receive as a freelancer. In 2020, the IRS introduced the form 1099-NEC (“non-employee compensation”) which is now used for freelancers and independent contractors. The 1099-Misc is still around, but it’s used for real miscellaneous items such as rental income or payments to an attorney. The 1099-Misc/1099-NEC is used if you earned more than $600 in a year working for a business. Notably, if you earn more than $600 working for an individual (not a business) then the client is not required to send you this form, but you are still responsible for reporting this income. There are other nuances as well, for example customers are not required to send the form if your business is incorporated. As we always recommend, it’s best to consult a tax professional if your tax needs are more complex.
1099-K’s on the other hand, are used for credit cards and third party transactions, and are typically sent if you accept bank cards as a form of payment. This form shows your total bank card revenue for the year. A financial institution will send this if you have a minimum of $20,000 in payments and at least 200 transactions in a year. Note, that the 1099-K typically reports the gross amount that is charged to the customer. You usually receive less than this after the bank processing fees are taken out, so make sure you keep track of those expenses as you are only required to pay taxes on the net amount, i.e. the profit from your sales after the expenses are deducted. This is discussed more in the expense section.
This system can result in the same $1 of revenue being reported to the government twice, on a form 1099-Misc and a 1099-K. If you did $1,500 in work for a business they will send you a 1099-Misc, but if you meet the thresholds for receiving a 1099-K it will show up there as well. That is one reason among many that it’s important for you to keep your own detailed records! This system can have weird results at times – say for example, you drive an Uber on weekends and made $15,000 in income as a driver, and made $750 in non-driving referral income. You’d see the $750 in a form 1099-Misc from Uber, but the other $15,000 wouldn’t show up in your taxes since you didn’t meet the threshold of $20,000 for the 1099-K. However, you’re still required to report the full $15,750 of income yourself (this will likely be reported on Schedule C of your tax return).