It has never been easier to find a job as an independent contractor since the whole world started working remotely in mid-March 2020. And it doesn't seem like this wave is going to decrease any time soon - job opportunities are everywhere, and working for foreign companies isn't so uncommon, on the contrary! Many have launched the self-employed era of their careers during the pandemic, enjoying the limitless possibilities of a global job market. But, there are two sides to every story, and this one is no different. As much as working as a freelancer can be rewarding, getting paid can be a complicated and lengthy process. In addition to this, you are responsible for your own taxes, and that can seem daunting at first. Let's see what you can do to make it easier - on yourself and your clients.
Challenges of international payroll
There are several things to consider when you hire someone that isn't working in the same country as you. From the employer's point of view, it is important to consider local labor laws, tax obligations in both countries, obligations towards the employee, necessary paperwork, and the overall legality of the relationship. And even when all of that is settled, the issue of payroll remains the most important one. No matter which method you choose, whether you opt for the more traditional SWIFT or the newest cryptocurrency trend, you need to be ready to lose money in fees and exchange rates. The same goes for the independent contractor; there are many things to consider - drafting a written contract, negotiating the total amount paid considering all the downsides, taking care of all the income tax obligations... It isn't particularly easy earning a living this way, but with independence comes responsibility. Here are several things every business owner and their independent contractors need to have in mind.
Responsibilities of independent contractors in the US
If you have decided to work as a freelancer in the United States, you need to keep in mind that you will be losing many privileges you have when you are an employee. Or better said, you will be responsible for providing employee benefits to yourself. The issue of misclassification of employees as freelancers is very important to the IRS and the Department of Labor. Your clients can't be responsible for your social security, payroll taxes, or even business expenses. In addition, you can't work for them full time, nor can they determine your vacation and schedule, contribute to your pension plan, or workers' compensation. You also aren't protected under the employment law. You are your own boss, and you need to assume the obligations along with the privilege that comes with that.
Self-employment tax is contributing to your health insurance
Your employee isn't paying the FICA tax on your behalf, but someone has to. Your tax payments are now your responsibility. The contribution you make covers both your Social Security and Medicare. The latter is up to 0,9% for high earners, but the former can be up to 15,3%. However, the SE tax can be reduced by half if you file the tax return.
There are other taxes you need to pay as well
SE tax is just the first one on your list. According to IRS, since there is no backup withholding done by the employee, you are also responsible for paying your income tax. Federal income tax in the US is progressive, which is an important factor for everyone looking to start their own business. You won't need to worry about high taxes while struggling to get your business off the ground. The more you earn, the more you will pay.
Since there are also state taxes and municipality taxes you may need to pay, check out our complete guide for independent contractor taxes.
Responsibilities of clients and companies hiring independent contractors
There are many benefits of hiring independent contractors for clients - you aren't required to pay medicare taxes, unemployment tax, withhold income, etc. However, according to IRS, you still have obligations and responsibilities.
The most important tax form you need to know all about is IRS Form 1099-NEC (previously reported in Box 7 of Form 1099-MISC). Since the beginning of 2020, the Form 1099-MISC is no longer used for this purpose, and the Form 1099-NEC is reintroduced. This form is vital for everyone who chooses to hire freelancers and independent contractors.
According to the IRS, the employer needs to report taxes for every payment of $600 and more made to an independent contractor using Form 1099-NEC. This is only done for freelances, nothing has changed for the employees, you are still required to file Form W-2 for them.
What do you need in order to file this form? Well, first, you need to have the necessary info from your contractors, starting with their TIN - Taxpayer identification number. You can obtain that by filing a Form W-9 tax form. This form is only used by US contractors. If you are working with an international contractor, they need to verify their country of residence by filling Form W-8BEN (for individuals) or W-8BEN-E Form (for entities).
Tax deductions for self-employed
Although the responsibility of the required taxes shifts from your employer to you once you become an independent contractor, there is a significant upside to being your own boss. IRS offers plenty of tax deductions to everyone who decides to launch their own small business.
All of the tax deductions are tied to your business expenses. That means that you can apply to reduce the taxes for:
- Home office expenses
- Office expenses
- Commissions and fees
- Legal, accounting, and tax professional services
And many more. For a detailed breakdown, make sure to check our in-depth article about tax deductions for independent contractors. There you will find everything you need.
Keep in mind that there are several important taxes that can't be deducted, such as all federal income taxes, including self-employment tax, personal use property taxes, and sales taxes.
How to invoice a client
In order to make sure that you are being paid as an independent contractor, you need to be able to charge your clients. If you are not accustomed to this part of business ownership, here you will find a brief explanation. For a more detailed overview of the topic, take a look at our guide for invoicing clients.
In order to guarantee that your clients will comply with everything you talk about, it is preferable to sign an independent contractor agreement. But before you offer them this, decide how you want to invoice them. Start by deciding if you are going to be charging them by the hour or by work done. Afterward, choose how frequently you will be invoicing them and how you will organize and keep track of the payments. Then you can move on to creating an invoice.
Your invoice needs to contain all of the necessary information. Pay less attention to the design and more to the content itself. Include all the information about your business, as well as information about your client. Make sure your invoices are numbered and that they contain not only the amount but also the due date for when your client needs to pay the fee. Another important detail to note is the payment method—more on that below.